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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of report (Date of earliest event reported): December 27, 2021

 

WSFS FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in Charter)

 

 

Delaware   001-35638   22-2866913

(State or Other Jurisdiction

of Incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

 

500 Delaware Avenue, Wilmington, Delaware 19801

(Address of Principal Executive Offices, and Zip Code)

 

(302) 792-6000

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

  o Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

  o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

  o Pre-commencement communication pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

  o

Pre-commencement communication pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.01 per share WSFS Nasdaq “Global Select Market”

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 
 
Item 2.01  Completion of Acquisition or Disposition of Assets.

 

On January 1, 2022 (the “Closing Date”), WSFS Financial Corporation (“WSFS” or the “Company”), the parent holding company of Wilmington Savings Fund Society, FSB (“WSFS Bank”), completed the transactions contemplated by the Agreement and Plan of Merger, dated as of March 9, 2021 (the “Agreement”), by and between WSFS and Bryn Mawr Bank Corporation (“Bryn Mawr”), a Pennsylvania corporation and the parent holding company of The Bryn Mawr Trust Company (“Bryn Mawr Bank”). On the Closing Date, (i) Bryn Mawr merged with and into WSFS (the “Merger”), with WSFS continuing as the surviving corporation in the Merger (the effective time of the Merger, “Effective Time”) and (ii) simultaneously with the Merger, Bryn Mawr Bank merged with and into WSFS Bank, with WSFS Bank continuing as the surviving bank (together with the Merger, the “Mergers”). The Mergers were described in the Registration Statement on Form S-4 (File No. 333-255329) filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 19, 2021 and amended on May 4, 2021 (as amended, the “Registration Statement”).

 

At the Effective Time, pursuant to the terms of the Agreement, each share of common stock, par value $1.00 per share, of Bryn Mawr, was converted into the right to receive 0.90 of a share of common stock, par value $0.01 per share, of WSFS, with cash paid in lieu of fractional shares.

 

The foregoing summary of the Agreement and the Mergers is not complete and is qualified in its entirety by reference to the complete text of the Agreement, which is contained in Annex A to the joint proxy statement/prospectus included in the Registration Statement, which is incorporated by reference as Exhibit 2.1 hereto and is incorporated herein by reference.

 

Item 5.02  Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

 

Pursuant to the terms of the Agreement, the board of directors of WSFS (the “Board”) increased the number of directors that comprised the Board to 14 directors, an increase of three, and appointed each of Francis J. Leto, Diego F. Calderin and Lynn B. McKee to fill the new seats on the Board, effective as of the Effective Time, to hold such office until his or her successor is elected and qualified or until his or her resignation or removal. Prior to the Merger, Mr. Leto was President and Chief Executive Officer and a director of Bryn Mawr, and Mr. Calderin and Ms. McKee were directors of Bryn Mawr. Mr. Leto is expected to be named to the Executive and Risk Committee and the Wealth Management Fiduciary Committee, Mr. Calderin is expected to be named to the Delivery Transformation Subcommittee and the Wealth Management Fiduciary Committee and Ms. McKee is expected to be named to the Personnel and Compensation Committee.

 

Messrs. Leto and Calderin and Ms. McKee will each be entitled to receive compensation as a non-employee member of the Board, as described the section entitled “Compensation of the Board of Directors” in the Company’s 2020 Proxy Statement, filed with the SEC on March 23, 2021, which is incorporated herein by reference.

 

In connection with the Agreement, Mr. Leto entered into a letter agreement with WSFS (the “Leto Letter Agreement”), effective as of the Closing Date. A description of the arrangements regarding Mr. Leto and the terms of the Leto Letter Agreement is set forth in the section titled “Interests of Bryn Mawr’s Directors and Executive Officers in the Mergers” of the Registration Statement and such description is incorporated herein by reference. The description of the Leto Letter Agreement is not complete and is subject to and qualified in its entirety by reference to the Leto Letter Agreement, a copy of which is attached as Exhibit 10.1 hereto and is incorporated herein by reference.

 

Since the beginning of the last fiscal year there have been no related party transactions between WSFS and any of Messrs. Leto and Calderin and Ms. McKee that would be reportable under Item 404(a) of Regulation S-K.

 
 
Item 7.01  Regulation FD Disclosure.

 

On January 3, 2022, the Company issued a press release announcing the consummation of the Mergers and the appointments of Messrs. Leto and Calderin and Ms. McKee to the Board. A copy of the Company’s press release dated January 3, 2022 is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

 

This information (including Exhibit 99.1) is being furnished under Item 7.01 of this Form 8-K and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 (“Exchange Act”) or otherwise subject to the liabilities of that section, and such information shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. 

Item 9.01  Financial Statements and Other Exhibits.

 

(a) Financial Statements of the Business Acquired.

The audited consolidated balance sheets of Bryn Mawr as of December 31, 2020 and December 31, 2019, the related audited consolidated statements of income, comprehensive income, cash flows and changes in shareholders’ equity for each of the years in the three year period ended December 31, 2020, and the related notes and reports of the independent auditor thereto are included as Exhibit 99.2 to this Form 8-K and incorporated herein by this reference, and the unaudited balance sheet of Bryn Mawr as of September 30, 2021, the related unaudited consolidated statements of income, comprehensive income, cash flows and changes in shareholders’ equity for the periods ended September 30, 2021 and September 30, 2020, and the related notes thereto are included as Exhibit 99.3 to this Form 8-K and incorporated herein by this reference.

 

(b) Pro Forma Financial Information.

The Company intends to file pro forma financial information under cover of Form 8-K/A not later than 71 calendar days after the date that this Form 8-K is required to be filed.

 

(d)Exhibits.

 

Number   Description
     

2.1

 

Agreement and Plan of Merger, dated as of March 9, 2021, by and between WSFS Financial Corporation and Bryn Mawr Bank Corporation (incorporated herein by reference to Annex A to Amendment No. 1 to the Registration Statement on Form S-4 (File No. 333- 255329) filed by WSFS Financial Corporation on May 4, 2021)*

10.1

 

Letter Agreement, dated as of March 8, 2021, by and between WSFS Financial Corporation and Francis J. Leto

23.1

  Consent of KPMG LLP, Bryn Mawr Bank Corporation’s independent registered public accounting firm
99.1  

Press Release dated January 3, 2022

99.2   Audited Financial Statements of Bryn Mawr Bank Corporation and the related reports of the independent auditor thereto

99.3

 

Unaudited Financial Statements of Bryn Mawr Bank Corporation

104   Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

* Previously filed. Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the SEC upon request; provided, however, that the parties may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any document so furnished.

 
 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

     
  WSFS Financial Corporation
   
  By: /s/ Dominic C. Canuso
    Dominic C. Canuso
    Executive Vice President and Chief Financial Officer
   
  Date: January 3, 2022

 

 

 

Exhibit 10.1

 

CONFIDENTIAL
March 8, 2021

Francis J. Leto

[Intentionally omitted]

Dear Frank:

As you are aware, Bryn Mawr Bank Corporation (“BMBC”), is entering into a merger agreement with WSFS Financial Corporation (the “Merger Agreement”), pursuant to which WSFS Financial Corporation will acquire BMBC and its wholly owned subsidiary, Bryn Mawr Bank (the “Transaction”). Following the closing of the Transaction (the “Closing Date”), BMBC’s operations, including the operations of BMBC Bank, will be merged with those of WSFS Financial Corporation and Wilmington Savings Fund Society, FSB (collectively, “WSFS”). References to “BMBC” in this offer letter refer to BMBC or any affiliate of BMBC (including BMBC Bank).

In anticipation of the Transaction, you and WSFS have agreed that effective as of the Closing Date, and subject to our customary interview and onboarding process, you shall be designated to serve as a member of the boards of directors of WSFS Financial Corporation and Wilmington Savings Fund Society, FSB (collectively the “WSFS Boards”) and that the relationship between you and WSFS shall be governed by the terms and conditions of this letter agreement (this “Letter”). Importantly, your designation to serve as a member of the WSFS Boards, and the terms and conditions of this Letter, are contingent on the closing of the Transaction and, unless you are terminated without Cause (as defined in your BMBC Executive Change-of-Control Severance Agreement, dated as of November 2, 2009 (the “BMBC CIC Agreement”)), your continued employment with BMBC through the Closing Date. Unless effective earlier, your termination from employment will be effective as of the closing.

1.             Term; Positions; Location.

a.             Agreement Term. Except as otherwise set forth below, the terms and conditions contained in this Letter shall be effective during the Agreement Term. “Agreement Term” shall be the period beginning on the Closing Date and ending on the thirty-six month anniversary of the Closing Date.

b.             Directorship. You shall be designated to serve as a member of the WSFS Boards. As a member of the WSFS Boards, you shall devote such time and efforts as is consistent with the requirements and expectations of WSFS for members of the WSFS Boards generally. Your position on the WSFS Boards shall terminate upon your cessation of service on the WSFS Boards as a result of resignation, removal or otherwise. For the avoidance of doubt, nothing in this Letter, including the length of the Agreement Term, is intended to limit, restrict, modify or otherwise affect the rights of the stockholders and directors, as applicable, to appoint, elect or remove directors in accordance with the terms of the certificate of incorporation or by-laws of WSFS.

 
 

c.             Location and Administrative Assistant. You may continue to use your BMBC office for up to six months following the Closing Date. During this time, your current assistant, Mary Bradley, will support you and WSFS will continue to employ Ms. Bradley for at least 12 months following the Closing Date at a base salary that is no less than the base salary provided to Ms. Bradley immediately prior to the Closing Date.

2.             Payments and Benefits.

a.            Board Fees. During the period that you serve as a member of the WSFS Boards, WSFS shall pay to you such fees as are generally paid to other members of the WSFS Boards.

b.            Reimbursements. WSFS shall reimburse you for reasonable and customary out-of-pocket expenses incurred by you in connection with the performance of services pursuant to this Letter in accordance with WSFS’s standard reimbursement policies applicable to members of the WSFS Boards.

c.            Additional Consideration. As additional consideration for your agreements and undertakings in this Letter, WSFS shall pay you $500,000 (the “Additional Consideration”) in a lump sum within thirty days following the Closing Date.

3.             Restrictive Covenants.

a.             Non-Competition and Non-Solicitation.

i.               You agree that during the Restricted Period (as defined below) you shall not, anywhere where WSFS, BMBC or any of their affiliates conduct business of as of the Closing, (1) engage in or actively prepare to engage in, as a director, officer, employee, consultant, or advisor, the business of wealth management services or trust services in any capacity, including duties and responsibilities similar to those you have undertaken for WSFS, BMBC or any of their affiliates, (2) own, invest in or lend money to any entity that engages in the business described in clause (1); provided, however, that this clause (2) shall not prohibit you from owning, solely as a passive investment, up to 5% of any publicly traded company, (3) render competing services to, or with respect to such services, solicit, any client of WSFS, BMBC or any of their affiliates for whom you performed services on behalf of WSFS, BMBC or their affiliates, or (4) render competing services to, or with respect to such services, solicit, any potential client of WSFS, BMBC or their affiliates with whom you had contact on behalf of WSFS, BMBC or their affiliates.

ii.            You further agree that during the Restricted Period you shall not, anywhere within one hundred miles of Bryn Mawr, Pennsylvania, (1) engage in or actively prepare to engage in, as a director, officer, employee, consultant, or advisor, the business of commercial or consumer banking or lending services in any capacity or (2) own, invest in or lend money to any entity that engages in the business described in clause (1); provided, however, that this clause (2) shall not prohibit you from owning, solely as a passive investment, up to 5% of any publicly traded company.

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.                 For clarity, your obligations under paragraphs (3)(a)(i) and 3(a)(ii), above, shall not prohibit you from participating in, consulting for, or otherwise engaging with a private equity firm or hedge fund, regardless of investment type, provided that, in connection with such engagement, you do not consult for or with respect to any wealth management or trust services business operating within 100 miles of Bryn Mawr, Pennsylvania, in which such firm or fund is invested or may invest.

i.                You further agree that during the Restricted Period you shall not, on your own behalf or on behalf of any person or entity, other than WSFS and its affiliates, directly or indirectly solicit for competitive purposes, or otherwise solicit with respect to wealth management services, any person or entity who is or was a current or prospective client of BMBC during the last two years of your employment with BMBC (“BMBC Clients”) or a current or prospective client of WSFS or any of its affiliates during your service as a director to WSFS, provided that you shall not be in breach of this paragraph 3(a)(iv) with respect to solicitation of any clients or prospective clients of WSFS or its affiliates with whom you had no contact through WSFS or BMBC, if, upon written notice from WSFS, you promptly cease such solicitation and cooperate with WSFS to cure such solicitation, if curable.

ii.               You further agree that during the Restricted Period, you shall not solicit, attempt to solicit, hire or participate in the recruitment of any employee of WSFS or its affiliates, provided that the placement of a general advertisement not directed at employees of WSFS or its affiliates shall not violate this covenant. This restriction shall only apply to anyone who is then, or was within six months prior to such solicitation, attempt, hiring or recruitment, an employee of WSFS, BMBC or their affiliates. Notwithstanding the foregoing, the solicitation and/or hiring of Mary Bradley, your current administrative assistant, shall not be a violation of this paragraph 3(a)(v).

b.             Non-Disclosure of Confidential Information. You covenant and agree that the Confidential Information (as defined below) is a valuable, special, and unique asset of BMBC and WSFS. You will use Confidential Information solely for purposes of performing your duties for WSFS, and you will return any and all Confidential Information in your possession upon the request of WSFS at any time. You further agree that you will not use or disclose to others any Confidential Information, except as authorized in writing by WSFS. You further agree that WSFS owns the Confidential Information and that you have no rights, title, or interest in any of the Confidential Information. You further agree that your confidentiality obligations described herein shall continue for so long as the Confidential Information remains confidential and shall not apply to any information that becomes generally known to the public through no fault or action of your own. Notwithstanding this paragraph 3(b), nothing in this Letter shall prohibit you from reporting possible violations of law to a governmental agency or entity or require you to seek authorization or notify WSFS if you makes such reports. You are hereby advised that you may be entitled to immunity from liability for certain disclosures of trade secrets under the Defend Trade Secrets Act, 18 USC § 1833(b). The provisions of this paragraph 3(b) shall survive the expiration or termination of the Agreement Term for any reason.

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c.             Acknowledgments. By signing this Letter, you acknowledge and agree that the restrictions contained in this paragraph 3 are no broader than are necessary to protect WSFS’s legitimate business interests, are reasonable in both scope and duration, and do not unduly restrict your ability to pursue your chosen livelihood. You further acknowledge (i) that WSFS would not have entered into the Merger Agreement, (ii) that WSFS would not have agreed to this offer to designate you as a member of the WSFS Boards and the other terms and conditions in this Letter, including the provision of the Additional Consideration, and (iii) that WSFS would not have agreed to provide you with access to Confidential Information, if you did not agree to the provisions of this paragraph 3. Additionally, you acknowledge that you will receive certain benefits in connection with the Transaction, including payments in respect of the BMBC equity you hold.

d.            Reformation and Enforceability. It is the intention of the parties that if any of the restrictions set forth in this paragraph 3 are found by a court of competent jurisdiction to be overly broad, unreasonable, or otherwise unenforceable then these restrictions shall be modified and enforced to the greatest extent that the court deems permissible. Each of the obligations in this paragraph 3 are independent, separable and enforceable independent of each other.

e.             Definitions. For the purposes of this Letter, including this paragraph 3:

i.            Confidential Information” shall mean any and all trade secrets, confidential and proprietary information, and all other information and data of WSFS and its affiliates (inclusive of predecessor companies that have been acquired by WSFS, including BMBC) that is generally unknown to third persons who could derive economic value from its use or disclosure including, but not limited to, non-public customer information, including customer lists, customer requirements, customer needs, customer purchasing histories, and customer sales trends; product and services cost pricing and varying supplies and vendor information including costs, discount and rebate programs, and logistics information; and operational, financial, and marketing information propriety to or held confidential by WSFS. Confidential Information may be contained in writing or in any other tangible medium of expression, including work product created by you in rendering services for WSFS; provided, however, that the term “Confidential Information” does not include any information that (1) is now in or subsequently enters the public domain other than as a result of your violation of a confidentiality obligation to WSFS, BMBC or their affiliates or (2) is lawfully communicated to you by a third party, free of any confidential obligation, subsequent to the time of communication thereof by, through or on behalf of WSFS.

ii.            Restricted Period: “Restricted Period” shall mean the period beginning on the Closing Date and ending at the expiration of the Agreement Term, regardless of when your service as a director ends.

4.             Contingent on Closing. As noted above, payment of the Additional Consideration and all other terms and conditions contained in this Letter are contingent on the closing of the Transaction as contemplated by the Merger Agreement and, except as noted above, your continued employment with BMBC through the Closing Date. In the event that the closing of the Transaction does not occur for any reason, including the termination of the Merger Agreement in accordance with its terms, this Letter will be null and void.

5.             Return of Property. Upon the request of WSFS, you agree to surrender to WSFS all proprietary or Confidential Information and articles and property that belong to WSFS, except that you will be permitted to retain your current mobile phone, ipads and laptop computer provided that that WSFS will be permitted to remove all Confidential Information from the same.

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6.             Taxes and Withholding.

a.            Withholding. All amounts payable hereunder will be subject to applicable taxes and withholding. Regardless of the amount withheld, you are solely responsible for paying all required taxes (other than WSFS’s share of employment taxes, where applicable) on all payments made.

b.             Section 409A. It is intended that all payments described in this Letter comply with, or are exempt from, Section 409A (“Section 409A”) of the Internal Revenue Code (the “Code”); provided, however, that nothing herein shall be interpreted to transfer liability for any tax (including any due as a result of a violation of Section 409A) from you to WSFS or any other person or entity. This Letter shall be interpreted and administered to maximize the exemptions from Section 409A and, to the extent this Letter provides for deferred compensation subject to Section 409A, to comply with Section 409A. To the extent necessary to comply with Section 409A, in no event may you, directly or indirectly, designate the taxable year of payment. The parties agree that this Letter may be amended, as reasonably requested by either party, and as may be necessary to fully comply with Section 409A in order to preserve the payments and benefits provided hereunder without additional cost to either party.

c.             Section 280G. If any benefits payable to you by BMBC or WSFS or their affiliates (i) are “parachute payments” within the meaning of Section 280G of the Code, and (ii) but for this paragraph 6(c), would be subject to the “golden parachute” excise tax imposed by Code Section 4999, then the benefits payable to you will be reduced to a level that will result in no tax under Code Section 4999 unless it would be better economically for you to receive all of the benefits and pay the excise tax. Any determination required under this paragraph 6(c) will be made in by an independent professional services firm chosen and paid for by WSFS. Before and after the Closing Date, you agree to reasonably negotiate in good faith with WSFS to implement measures to minimize any payments or benefits from being characterized as “excess parachute payments” within the meaning of Section 280G(b)(1) of the Code.

d.            Tax Advice. You are encouraged to obtain your own tax advice regarding your compensation from WSFS. You agree that WSFS does not have a duty to design its compensation policies in a manner that minimizes your tax liabilities, and you will not make any claim against WSFS or any of its affiliates related to tax liabilities arising from your compensation.

7.             BMBC Change-of-Control Severance Agreement. The Merger Agreement provides that BMBC may terminate the BMBC CIC Agreement prior to, and contingent upon, the Closing. You hereby agree and acknowledge that if the BMBC CIC Agreement is so terminated and (i) on or before the next payroll date practical following the Closing Date, you are paid, subject to applicable taxes and withholding, a cash payment equal to $2,012,484.72, and (ii) to the extent unpaid prior to Closing, you are paid on or before January 31, 2022, subject to applicable taxes and withholding, a cash payment equal to $358,582, which is your target Annual Incentive Plan opportunity for 2021, then you shall have no further rights under or with respect to the BMBC CIC Agreement, and you agree that you will not challenge or object to such termination. In addition, all of your outstanding time and performance based BMBC restricted stock units granted pursuant to the Amended and Restated Bryn Mawr Bank Corporation 2010 Long Term Incentive Plan will vest upon the Closing Date as set forth in the Merger Agreement.

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8.             Miscellaneous Provisions

a.            Entire Agreement. This Letter constitutes the entire agreement between the parties and supersedes all prior agreements and understandings relating to the subject matter of this Letter, including any agreement between you and BMBC, WSFS, or any of their affiliates, whether written or oral, except as set forth above with respect to the BMBC CIC Agreement; for clarity, the Merger Agreement is independent of this Letter. You hereby agree and acknowledge that your BMBC Executive Change-of-Control Severance Agreement and any other agreements with BMBC are terminated as of the Closing Date; the foregoing does not apply to BMBC equity grants or vested BMBC equity rights, which shall each be treated in accordance with the provisions of the Merger Agreement. Notwithstanding the foregoing, any existing covenants regarding non-competition and non-solicitation to which you are bound with BMBC and its affiliates are not superseded by this Letter and will continue in effect following the Closing Date in accordance with their terms. Your position as a member of the WSFS Boards shall be subject to the policies and governing documents of the WSFS Boards, including the WSFS certificate of incorporation and the by-laws of WSFS.

b.             Governing Law; Dispute Resolution; Remedies. This Letter shall be governed by and construed in accordance with the laws of Pennsylvania (without regard to conflict of laws principles), and any dispute pertaining to or arising out of this Letter shall be brought only in the state or federal courts located within Montgomery County, Pennsylvania. By signing this Letter you irrevocably consent to the personal jurisdiction of the state and federal courts located within Pennsylvania. You agree that any breach or threatened breach of your obligations in paragraph 3 will cause WSFS substantial and irrevocable damage for which it would have no adequate remedy at law and you therefore agree that WSFS will be entitled to injunctive relief in the event of any such breach or threatened breach, without the necessity of showing actual damages or that monetary damages would not afford an adequate remedy, and without the necessity of posting any bond or other security. Each right, obligation and remedy set forth in this Letter shall be cumulative and in addition to the other rights, obligations and remedies set forth herein or under other agreements, at law or in equity.

c.             Counterparts. This Letter may be executed in counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument.

d.            Assignment. The provisions of this Letter shall bind and inure to the benefit of WSFS and its successors and assigns. You may not assign this Letter.

e.             Amendment and Waiver. No failure or delay on the part of you or WSFS in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. Any amendment, supplement or modification of or to any provision of this Letter and any waiver of any provision of this Letter shall be effective (i) only if it is made or given in writing and signed by each party hereto or, in the case of a waiver, by the party granting the waiver and (ii) only in the specific instance and for the specific purpose for which made or given.

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f.              Severability. If any provision of this Letter is held invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions of this Letter shall not be affected or impaired in any way.

g.            Construction. You and WSFS agree that you each have been represented by counsel during the negotiation and execution of this letter and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. The headings in this Letter are only for convenience and are not intended to affect construction or interpretation. The words “include,” “includes” and “including,” when used in this Letter, will be deemed to be followed by the phrase “but not limited to”. The words “hereof”, “herein” and “hereunder” and words of similar import when used in this Letter shall refer to this Letter as a whole and not to any particular provision of this Letter. As used in this Letter, an “affiliate” of an entity shall mean a second entity controlling, controlled by or under common control with such first entity.

[Remainder of the Page Left Blank]

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We hope you will indicate your acceptance of the terms of this Letter set forth above by signing and dating in the spaces indicated below.

 

 

Sincerely,

   
  /s/ Rodger Levenson
  Rodger Levenson
  Chairman, President and Chief Executive Officer
  WSFS Financial Corporation
   
  /s/ Rodger Levenson
  Rodger Levenson
  Chairman, President and Chief Executive Officer
  Wilmington Savings Fund Society, FSB

I acknowledge that I have read, understand and agree to the terms and conditions of this Letter:

 

    Francis J. Leto
     
3/9/2021   /s/ Francis J. Leto
Date   Signature
     

 

Exhibit 23.1

 

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the registration statements (No. 333-235572) on Form S-3 and (Nos. 333-256355, 333-230134, 333-189782, 333-169548, 333-146443, 333-127225, 333-106561, 333-40032, 333-33713, and 333-26099) on Form S-8 of WSFS Financial Corporation of our report dated March 1, 2021, with respect to the consolidated financial statements of Bryn Mawr Bank Corporation and subsidiaries, which report appears in the Form 8-K of WSFS Financial Corporation dated January 3, 2022.

/s/ KPMG LLP

Philadelphia, Pennsylvania

December 31, 2021

 

 

Exhibit 99.1

 

  

FOR IMMEDIATE RELEASE   Investor Relations Contact: Dominic C. Canuso
    (302) 571-6833
January 3, 2022  

dcanuso@wsfsbank.com 

    Media Contact: Rebecca Acevedo
    (215) 253-5566
    racevedo@wsfsbank.com

 

WSFS Financial Corporation Completes Acquisition of Bryn Mawr Bank Corporation and Welcomes Three New Board Members

 

WILMINGTON, Del. – WSFS Financial Corporation (Nasdaq: WSFS), the parent company of WSFS Bank, completed the acquisition of the Bryn Mawr Bank Corporation (Nasdaq: BMTC) (“Bryn Mawr”), and its primary subsidiary, The Bryn Mawr Trust Company (“Bryn Mawr Trust”), as of January 1, 2022. In addition, in accordance with the merger agreement between WSFS and Bryn Mawr, Frank J. Leto, Lynn B. McKee, and Diego F. Calderin are joining the Board of Directors of WSFS and WSFS Bank. With the acquisition finalized, WSFS strengthens its position as the premier, locally headquartered bank and wealth management franchise in the Greater Philadelphia and Delaware region with approximately $20 billion in assets, and approximately $49 billion in assets under administration and management.

 

“Both companies bring a long history of service for our Customers and Communities, and together we will bring a deeper level of knowledge and commitment to the region,” said Rodger Levenson, WSFS’ Chairman, President and CEO. “Our Customers will benefit from a highly engaged and dedicated team whose primary focus is delivering premier products and services to the Greater Philadelphia and Delaware region.” Levenson added, “We are also pleased to welcome Frank Leto, Lynn McKee, and Diego Calderin to the WSFS Board of Directors. We know they will bring new ideas, perspectives, and industry acumen to complement the current Board’s leadership and institutional knowledge.”

 

Bryn Mawr Trust and WSFS Customer relationships will continue business as usual until the anticipated systems integration and brand conversion in late Q1 2022.

 

Bryn Mawr Trust Wealth Management Clients will continue to be served by the same professionals from Bryn Mawr Trust Wealth Management. The integration of WSFS Wealth and Bryn Mawr Trust Wealth Management groups will take place throughout 2022. Both banks’ Customers, however, have immediate and free access to the combined WSFS and Bryn Mawr Trust ATM network of more than 600 ATMs.

 

The new board members bring a wealth of knowledge and experience. Frank Leto served as the President of Bryn Mawr since May 2014, and Chief Executive Officer of Bryn Mawr and Bryn Mawr Trust since January 2015. Prior to that, between 2009 and 2014, Leto held a number of roles within the organization including Executive Vice President of Bryn Mawr Trust’s Wealth Management division, General Counsel, and Chief Operating Officer. Leto was also one of the longest standing directors of Bryn Mawr and Bryn Mawr Trust, having served on the Boards of Directors from 2002 to 2021, including as Lead Independent Director from 2006 through 2009.

Active in the community, Leto’s charitable work includes board positions with The Andalusia Foundation, The Bryn Mawr Hospital Foundation and Pennsylvania Bankers Association. He previously served on the Boards of AIM Academy, Baker Industries, The Bryn Mawr Film Institute, The Pennsylvania Academy of Fine Arts, The Pennsylvania Association of Community Bankers and The Riddle Healthcare Foundation. Leto earned a bachelor’s degree in political science from Saint Joseph’s University and a J.D. (cum laude) from The Delaware Law School of Widener University.

   

 

 

Lynn McKee is Executive Vice President, Human Resources for Aramark, a global services management company employing about 248,000 associates across 19 countries. In her role, McKee is responsible for all aspects of human resources, including building culture and employee engagement; compensation and benefits; talent management, including talent acquisition, executive and leadership development and succession planning; and employee and labor relations. McKee also oversees Aramark’s Diversity, Equity and Inclusion, Sustainability, and Community Relations functions in addition to Corporate Services.

 

McKee previously served as a member of the Boards of Directors of Bryn Mawr and Bryn Mawr Trust, where she was Chair of the Management Development & Compensation Committee, and as a member of the Board of Trustees for Saint Joseph’s University in Philadelphia, where she was Chair of the Facilities & Information Technology Committee. McKee earned her undergraduate degree in Accounting from Saint Joseph’s University and her MBA from Drexel University.

 

Diego Calderin is the co-founder and Managing Partner of Banbury Systems, a data acquisition platform company that provides inventory tracking using advanced RFID readers with GPS and cellular transmission. He was the original co-founder and Chief Technology Officer of Anexinet, which became an award-winning Digital Systems Integration company. In 2014, Calderin and his partners sold Anexinet to a private equity company. Prior to Anexinet, Calderin was a software engineer with General Electric and consulted at Fortune 500 companies. Calderin brings significant experience in business management, technology and financial services industries.

 

Calderin previously served as a member of the Boards of Directors of Bryn Mawr and Bryn Mawr Trust, where he was Chair of the IT Steering Committee, and as a member of the Board of Trustees for The Haverford Trust Company, a money management firm. He is also a member of the Board of Trustees for La Salle University, where he serves on the Finance, Facilities and Student Affairs Committees.

 

About WSFS Financial Corporation

 

WSFS Financial Corporation is a multi-billion-dollar financial services company. Its primary subsidiary, WSFS Bank, is the oldest and largest locally managed bank and trust company headquartered in Delaware and the Greater Philadelphia region. As of September 30, 2021, WSFS Financial Corporation had $15.4 billion in assets on its balance sheet and $27.6 billion in assets under management and administration. WSFS operates from 112 offices, 89 of which are banking offices, located in Pennsylvania (52), Delaware (42), New Jersey (16), Virginia (1) and Nevada (1) and provides comprehensive financial services including commercial banking, retail banking, cash management and trust and wealth management. Other subsidiaries or divisions include Arrow Land Transfer, Cash Connect®, Cypress Capital Management, LLC, Christiana Trust Company of Delaware®, NewLane Finance®, Powdermill® Financial Solutions, West Capital Management®, WSFS Institutional Services®, WSFS Mortgage®, and WSFS Wealth® Investments. Serving the Greater Delaware Valley since 1832, WSFS Bank is one of the ten oldest banks in the United States continuously operating under the same name. For more information, please visit www.wsfsbank.com.

 

   

 

 

 

Forward-Looking Statements

 

This press release contains estimates, predictions, opinions, projections and other “forward-looking statements” as that phrase is defined in the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, references to WSFS’ predictions or expectations of future business or financial performance as well as its goals and objectives for future operations, financial and business trends, business prospects, and management’s outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations. The words “believe,” “expect,” “anticipate,” “will,” and similar expressions, among others, generally identify forward-looking statements. Such forward-looking statements are based on various assumptions (some of which may be beyond WSFS’ control) and are subject to significant risks and uncertainties (which change over time) and other factors, including WSFS’ acquisition of Bryn Mawr and the uncertain effects of the COVID-19 pandemic and actions taken in response thereto on WSFS’ business, results of operations, capital and liquidity, which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties are discussed in detail in WSFS’ and Bryn Mawr’s Form 10-K for the year ended December 31, 2020, Form 10-Q for the quarter ended March 31, 2021, Form 10-Q for the quarter ended June 30, 2021, Form 10-Q for the quarter ended September 30, 2021, and other documents filed by WSFS and Bryn Mawr with the Securities and Exchange Commission from time to time.

 

WSFS cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date on which they are made, and WSFS disclaims any duty to revise or update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of WSFS for any reason, except as specifically required by law. As used in this press release, the terms “WSFS”, “the Company”, “registrant”, “we”, “us”, and “our” mean WSFS Financial Corporation and its subsidiaries, on a consolidated basis, and the term “Bryn Mawr” means Bryn Mawr Bank Corporation and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

 

###

 

   

 

e21568_ex99-2.htm

Exhibit 99.2

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Directors

Bryn Mawr Bank Corporation:

 

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Bryn Mawr Bank Corporation and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments”.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

1
 

Allowance for credit losses on loans collectively evaluated

As discussed in Note 2 to the consolidated financial statements, the Company adopted ASU No. 2016-13 (Topic 326) “Measurement of Credit Losses on Financial Instruments” as of January 1, 2020. The total allowance for credit losses as of January 1, 2020 was $26.9 million, which included the allowance for loans collectively evaluated for commercial real estate (nonowner-occupied and owner-occupied), home equity lines of credit, residential mortgage (first lien and junior lien), construction and consumer loans (the January 1, 2020 collective ACL). As discussed in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for credit losses on loans as of December 31, 2020 was $53.7 million, of which $52.5 million related to the allowance for credit losses on loans collectively evaluated for commercial real estate (nonowner-occupied and owner-occupied), home equity lines of credit, residential mortgage (first lien and junior lien), construction and consumer loans (the December 31, 2020 collective ACL). The Company estimates the collective ACL utilizing a discounted cash flow (DCF) methodology applied to portfolio segments and their loan pools segregated by similar risk characteristics. The Company’s DCF methodology adjusts loan level contractual cash flows for probability of default and loss given default (collectively, loss expectations) and prepayment and curtailment rate assumptions to calculate expected future cash flows. A correlation between the selected macroeconomic indicator and historic loss levels, adjusted to include representative peer group loss experience, was developed to predict loss expectations based on current economic conditions and a reasonable and supportable forecast period. At the end of the reasonable and supportable forecast period, the Company reverts to the long-term mean of the macroeconomic indicator immediately. The collective ACL also includes qualitative adjustments for factors that are not captured in the loss expectations output.

We identified the assessment of the January 1, 2020 collective ACL and the December 31, 2020 collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment due to measurement uncertainty. Specifically, the assessment encompassed the evaluation of the collective ACL methodology and its significant assumptions including (1) the loss expectations, (2) the selection of the macroeconomic indicator, (3) the reasonable and supportable forecast period, and (4) prepayment and curtailment rates. The assessment also included an assessment of the development of the qualitative adjustments as well as an evaluation of the conceptual soundness of the development of the loss expectations. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collective ACL estimates, including controls over the:

development of the ACL methodology
development of the loss expectations
identification and determination of significant assumptions used in the collective ACL methodology
the development of the qualitative adjustments
analysis of the collective ACL results and trends.

 

2
 

We evaluated the Company’s process to develop the collective ACL estimates by testing certain sources of data, factors, and assumptions that the Company used and considered the relevance and reliability of such data, factors and assumptions. We involved credit risk professionals with specialized skills and knowledge, who assisted in:

evaluating the Company’s collective ACL methodology for compliance with U.S. generally accepted accounting principles
evaluating judgments made by the Company relative to the development of the loss expectations by comparing the loss expectations to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
assessing the conceptual soundness of the loss expectations by inspecting the Company’s documentation to determine whether the loss expectations are suitable for the intended use
assessing the selection of the macroeconomic indicator by comparing the macroeconomic indicator to the Company’s business environment and relevant industry practices
evaluating the length of the reasonable and supportable economic forecast period by comparing the period to specific portfolio risk characteristics and trends
evaluating the prepayment and curtailment rates by comparing them to relevant Company-specific metrics and trends
evaluating the methodology used to develop the qualitative adjustments and the effect of those adjustments on the collective ACL compared with relevant credit risk factors and consistency with credit trends and identified limitations of the loss expectations.

We also assessed the sufficiency of the audit evidence obtained related to the January 1, 2020 collective ACL and the December 31, 2020 collective ACL by evaluating the:

cumulative results of the audit procedures
qualitative aspects of the Company’s accounting practices
potential bias in the accounting estimates.

/s/ KPMG LLP

We have served as the Company’s auditor since 2004.

Philadelphia, Pennsylvania
March 1, 2021

 

3
 

Consolidated Balance Sheets

 

(dollars in thousands)

 

December 31,

2020

   

December 31,

2019

 

Assets

               

Cash and due from banks

  $ 11,287     $ 11,603  

Interest bearing deposits with banks

    85,026       42,328  

Cash and cash equivalents

    96,313       53,931  

Investment securities available for sale, at fair value (amortized cost of $1,161,098 and $1,001,034 as of December 31, 2020 and December 31, 2019, respectively)

    1,174,964       1,005,984  

Investment securities held to maturity, at amortized cost (fair value of $15,186 and $12,661 as of December 31, 2020 and December 31, 2019, respectively)

    14,759       12,577  

Investment securities, trading

    8,623       8,621  

Loans held for sale

    6,000       4,249  

Portfolio loans and leases, originated

    3,380,727       3,320,816  

Portfolio loans and leases, acquired

    247,684       368,497  

Total portfolio loans and leases

    3,628,411       3,689,313  

Less: Allowance for credit losses on originated loans and leases

    (50,783 )     (22,526 )

Less: Allowance for credit losses on acquired loans and leases

    (2,926 )     (76 )

Total allowance for credit losses on loans and leases

    (53,709 )     (22,602 )

Net portfolio loans and leases

    3,574,702       3,666,711  

Premises and equipment, net

    56,662       64,965  

Operating lease right-of-use assets

    34,601       40,961  

Accrued interest receivable

    15,440       12,482  

Mortgage servicing rights

    2,626       4,450  

Bank owned life insurance

    60,393       59,079  

Federal Home Loan Bank stock

    12,666       23,744  

Goodwill

    184,012       184,012  

Intangible assets

    15,564       19,131  

Other investments

    17,742       16,683  

Other assets

    156,955       85,679  

Total assets

  $ 5,432,022     $ 5,263,259  

Liabilities

               

Deposits:

               

Noninterest-bearing

  $ 1,401,843     $ 898,173  

Interest-bearing

    2,974,411       2,944,072  

Total deposits

    4,376,254       3,842,245  

Short-term borrowings

    72,161       493,219  

Long-term FHLB advances

    39,906       52,269  

Subordinated notes

    98,883       98,705  

Junior subordinated debentures

    21,935       21,753  

Operating lease liabilities

    40,284       45,258  

Accrued interest payable

    6,277       6,248  

Other liabilities

    154,000       91,335  

Total liabilities

    4,809,700       4,651,032  

Shareholders’ equity

               

Common stock, par value $1; authorized 100,000,000 shares; issued 24,713,968 and 24,650,051 shares as of December 31, 2020 and December 31, 2019, respectively, and outstanding of 19,960,294 and 20,126,296 as of December 31, 2020 and December 31, 2019, respectively

    24,714       24,650  

Paid-in capital in excess of par value

    381,653       378,606  

Less: Common stock in treasury at cost - 4,753,674 and 4,523,755 shares as of December 31, 2020 and December 31, 2019, respectively

    (89,164 )     (81,174 )

Accumulated other comprehensive income, net of tax

    8,948       2,187  

Retained earnings

    296,941       288,653  

Total Bryn Mawr Bank Corporation shareholders’ equity

    623,092       612,922  

Noncontrolling interest

    (770 )     (695 )

Total shareholders’ equity

    622,322       612,227  

Total liabilities and shareholders’ equity

  $ 5,432,022     $ 5,263,259  

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

4
 

Consolidated Statements of Income

 

   

Year Ended December 31,

 

(dollars in thousands, except share and per share data)

 

2020

   

2019

   

2018

 

Interest income:

                       

Interest and fees on loans and leases

  $ 155,916     $ 178,367     $ 168,638  

Interest on cash and cash equivalents

    295       543       264  

Interest on investment securities:

                       

Taxable

    11,388       14,330       11,854  

Non-taxable

    77       143       293  

Dividends

    5       6       6  

Total interest income

    167,681       193,389       181,055  

Interest expense:

                       

Interest on deposits

    16,971       35,936       20,552  

Interest on short-term borrowings

    702       2,792       3,392  

Interest on FHLB advances and other borrowings

    859       1,069       1,777  

Interest on subordinated notes

    4,426       4,578       4,575  

Interest on junior subordinated debentures

    936       1,373       1,288  

Total interest expense

    23,894       45,748       31,584  

Net interest income

    143,787       147,641       149,471  

Provision for credit losses

    41,677       8,595       7,089  

Net interest income after provision for credit losses

    102,110       139,046       142,382  

Noninterest income:

                       

Fees for wealth management services

    44,532       44,400       42,326  

Insurance commissions

    5,911       6,877       6,808  

Capital markets revenue

    9,491       11,276       4,848  

Service charges on deposits

    2,868       3,374       2,989  

Loan servicing and other fees

    1,646       2,206       2,259  

Net gain on sale of loans

    5,779       2,342       3,283  

Net gain on sale of investment securities available for sale

    -       -       7  

Net gain on sale of long-lived assets

    2,297       -       -  

Net gain (loss) on sale of other real estate owned (“OREO”)

    148       (84 )     295  

Dividends on FHLB and FRB stock

    1,151       1,505       1,621  

Other operating income

    8,148       10,288       11,546  

Total noninterest income

    81,971       82,184       75,982  

Noninterest expenses:

                       

Salaries and wages

    68,846       74,371       66,671  

Employee benefits

    12,605       13,456       12,918  

Occupancy and bank premises

    12,727       12,591       11,599  

Furniture, fixtures, and equipment

    9,432       9,693       8,407  

Impairment of long-lived assets

    1,605       -       -  

Advertising

    1,609       2,105       1,719  

Amortization of intangible assets

    3,567       3,801       3,656  

Due diligence, merger-related and merger integration expenses

    -       -       7,761  

Professional fees

    6,428       5,434       4,203  

Pennsylvania bank shares tax

    8       1,478       1,792  

Data processing

    5,777       5,517       4,942  

Other operating expenses

    20,123       17,981       16,739  

Total noninterest expenses

    142,727       146,427       140,407  

Income before income taxes

    41,354       74,803       77,957  

Income tax expense

    8,856       15,607       14,165  

Net income

  $ 32,498     $ 59,196     $ 63,792  

Net loss attributable to noncontrolling interest

    (75 )     (10 )     -  

Net income attributable to Bryn Mawr Bank Corporation

  $ 32,573     $ 59,206     $ 63,792  

Basic earnings per common share

  $ 1.63     $ 2.94     $ 3.15  

Diluted earnings per common share

  $ 1.63     $ 2.93     $ 3.13  

Dividends declared per share

  $ 1.06     $ 1.02     $ 0.94  

Weighted-average basic shares outstanding

    19,970,921       20,142,306       20,234,792  

Dilutive shares

    71,424       91,065       155,375  

Adjusted weighted-average diluted shares

    20,042,345       20,233,371       20,390,167  

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

5
 

Consolidated Statements of Comprehensive Income

 

   

Year Ended December 31,

 

(dollars in thousands)

 

2020

   

2019

   

2018

 

Net income attributable to Bryn Mawr Bank Corporation

  $ 32,573     $ 59,206     $ 63,792  
                         

Other comprehensive income (loss):

                       

Net change in unrealized gains (losses) on investment securities available for sale:

                       

Net unrealized gains (losses) arising during the period, net of tax expense (benefit) of $1,872, $2,696 and $(806), respectively

    7,044       10,139       (3,033 )

Reclassification adjustment for net gain on sale realized in net income, net of tax expense of $0, $0 and $(1), respectively

    -       -       (6 )

Reclassification adjustment for net gain realized on transfer of investment securities available for sale to trading, net of tax expense of $0, $0 and $(88), respectively

    -       -       (329 )

Unrealized investment losses, net of tax expense (benefit) of $1,872, $2,696 and $(895), respectively

    7,044       10,139       (3,368 )

Net change in unfunded pension liability:

                       

Change in unfunded pension liability related to unrealized loss, prior service cost and transition obligation, net of tax (benefit) expense of $(75), $(118) and $72, respectively

    (283 )     (439 )     269  

Total other comprehensive income (loss)

    6,761       9,700       (3,099 )

Total comprehensive income

  $ 39,334     $ 68,906     $ 60,693  

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

6
 

Consolidated Statements of Cash Flows

 

   

Year Ended December 31,

 

(dollars in thousands)

 

2020

   

2019

   

2018

 

Operating activities:

                       

Net income attributable to Bryn Mawr Bank Corporation

  $ 32,573     $ 59,206     $ 63,792  

Adjustments to reconcile net income to net cash provided by operating activities:

                       

Provision for credit losses

    41,677       8,595       7,089  

Depreciation of premises and equipment

    7,805       7,801       6,610  

Net gain on sale of long-lived assets

    (2,297 )     -       -  

Non-cash operating lease expense

    3,224       3,647       -  

Loss on disposal of premises and equipment

    825       69       1,627  

Impairment of long-lived assets

    1,605       -       -  

Net amortization of investment premiums and discounts

    5,128       2,800       3,044  

Net gain on sale of investment securities available for sale

    -       -       (7 )

Net gain on sale of loans

    (5,779 )     (2,342 )     (3,283 )

Stock-based compensation

    3,044       3,725       2,750  

Amortization and net impairment of mortgage servicing rights

    1,824       597       830  

Net accretion of fair value adjustments

    (3,707 )     (6,088 )     (9,883 )

Amortization of intangible assets

    3,567       3,801       3,656  

Impairment of other real estate owned (“OREO”) and other repossessed assets

    -       -       89  

Net (gain) loss on sale of OREO

    (148 )     84       (295 )

Net increase in cash surrender value of bank owned life insurance (“BOLI”)

    (1,314 )     (1,235 )     (1,177 )

Other, net

    786       (475 )     532  

Loans originated for resale

    (106,252 )     (90,865 )     (86,323 )

Proceeds from loans sold

    107,568       93,459       91,353  

Provision for deferred income taxes

    (3,678 )     1,539       9,839  

Change in income taxes payable/receivable

    340       5,897       415  

Change in accrued interest receivable

    (3,022 )     103       1,661  

Change in accrued interest payable

    29       (404 )     3,125  

Change in operating lease liabilities

    (3,156 )     (3,525 )     -  

Change in other assets

    (71,910 )     (33,018 )     (19,222 )

Change in other liabilities

    62,544       40,010       3,013  

Net cash provided by operating activities

    71,276       93,381       79,235  

Investing activities:

                       

Purchases of investment securities available for sale

    (894,815 )     (719,700 )     (338,421 )

Purchases of investment securities held to maturity

    (5,372 )     (4,868 )     (1,328 )

Proceeds from maturity and paydowns of investment securities available for sale

    632,015       293,987       278,895  

Proceeds from maturity and paydowns of investment securities held to maturity

    3,023       891       532  

Proceeds from sale of investment securities available for sale

    -       -       7  

Net change in FHLB stock

    11,078       (9,214 )     5,553  

Proceeds from calls of investment securities

    97,775       167,290       810  

Net change in other investments

    (1,059 )     (157 )     (4,056 )

Purchase of customer relationships

    -       (18 )     (366 )

Purchase of portfolio loans and leases

    -       -       (14,974 )

Net portfolio loan and lease originations

    (250,163 )     (264,822 )     (127,589 )

Proceeds from portfolio loans sold

    305,313       -       -  

Purchases of premises and equipment

    (1,348 )     (7,187 )     (19,426 )

Proceeds from the sale of long-lived assets

    3,166       -       -  

Acquisitions, net of cash acquired

    -       -       (380 )

Proceeds from sale of OREO

    534       418       525  

Net cash used in investing activities

    (99,853 )     (543,380 )     (220,218 )

Financing activities:

                       

Change in deposits

    534,404       243,836       226,598  

Change in short-term borrowings

    (421,058 )     240,852       14,502  

Dividends paid

    (21,356 )     (20,685 )     (19,289 )

Change in long-term FHLB advances and other borrowings

    (12,501 )     (3,240 )     (83,872 )

Payment of contingent consideration for business combinations

    (507 )     (875 )     (660 )

Cash payments to taxing authorities on employees’ behalf from shares withheld from stock-based compensation

    (633 )     (625 )     (1,639 )

Net proceeds from sale of (purchase of) treasury stock for deferred compensation plans

    (153 )     (172 )     2  

Repurchase of warrants from U.S. Treasury

    -       -       (1,755 )

Net purchase of treasury stock through publicly announced plans

    (7,249 )     (4,524 )     (5,936 )

Proceeds from exercise of stock options

    12       907       1,464  

Net cash provided by financing activities

    70,959       455,474       129,415  
7
 
   

Year Ended December 31,

 

(dollars in thousands)

 

2020

   

2019

   

2018

 

Change in cash and cash equivalents

    42,382       5,475       (11,568 )

Cash and cash equivalents at beginning of period

    53,931       48,456       60,024  

Cash and cash equivalents at end of period

  $ 96,313     $ 53,931     $ 48,456  

Supplemental cash flow information:

                       

Cash paid during the year for:

                       

Income taxes

  $ 12,203     $ 12,716     $ 3,449  

Interest

  $ 23,865     $ 46,152     $ 28,453  

Non-cash information:

                       

Change in other comprehensive income (loss)

  $ 6,761     $ 9,700     $ (3,099 )

Change in deferred tax due to change in comprehensive income

  $ 1,797     $ 2,578     $ (823 )

Transfer of loans to other real estate owned and repossessed assets

  $ 386     $ 72     $ 372  

Acquisition of noncash assets and liabilities:

                       

Assets acquired

  $ -     $ -     $ 1,096  

Liabilities assumed

  $ -     $ -     $ 687  
8
 

Consolidated Statements of Changes In Shareholders Equity

(dollars in thousands, except share and per share data)

 

   

For the Years Ended December 31, 2018, 2019, and 2020

 
   

Shares of
Common
Stock
Issued

   

Common
Stock

   

Paid-in
Capital

   

Treasury
Stock

   

Accumulated
Other
Comprehensive
(Loss) Income

   

Retained
Earnings

   

Noncontrolling
Interest

   

Total
Shareholders’
Equity

 

Balance December 31, 2017

    24,360,049     $ 24,360     $ 371,486     $ (68,179 )   $ (4,414 )   $ 205,549     $ (683 )   $ 528,119  

Net income attributable to Bryn Mawr Bank Corporation

    -       -       -       -       -       63,792       -       63,792  

Net income attributable to noncontrolling interest

    -       -       -       -       -       -       -       -  

Goodwill measurement period adjustment effect on noncontrolling interest

    -       -       2       -       -       -       (2 )     -  

Dividends paid or accrued, $0.94 per share

    -       -       -       -       -       (19,209 )     -       (19,209 )

Other comprehensive loss, net of tax benefit of $823

    -       -       -       -       (3,099 )     -       -       (3,099 )

Stock-based compensation

    -       -       2,750       -       -       -       -       2,750  

Retirement of treasury stock

    (2,253 )     (2 )     (20 )     22       -       -       -       -  

Net purchase of treasury stock from stock awards for statutory tax withholdings

    -       -       -       (1,639 )     -       -       -       (1,639 )

Net purchase of treasury stock for deferred compensation trusts

    -       -       153       (151 )     -       -       -       2  

Purchase of treasury stock through publicly announced plans

    -       -       -       (5,936 )     -       -       -       (5,936 )

Repurchase of warrants from U.S. Treasury

    -       -       (1,853 )     -       -       98       -       (1,755 )

Common stock issued:

                                                               

Common stock issued through share-based awards and options exercises

    184,990       184       1,382       -       -       -       -       1,566  

Shares issued in acquisitions(1)

    2,562       3       110       -       -       -       -       113  

Balance December 31, 2018

    24,545,348     $ 24,545     $ 374,010     $ (75,883 )   $ (7,513 )   $ 250,230     $ (685 )   $ 564,704  
                                                                 

Net income attributable to Bryn Mawr Bank Corporation

    -       -       -       -       -       59,206       -       59,206  

Net loss attributable to noncontrolling interest

    -       -       -       -       -       -       (10 )     (10 )

Dividends paid or accrued, $1.02 per share

    -       -       -       -       -       (20,783 )     -       (20,783 )

Other comprehensive loss, net of tax benefit of $2,578

    -       -       -       -       9,700       -       -       9,700  

Stock based compensation

    -       -       3,725       -       -       -       -       3,725  

Retirement of treasury stock

    (2,704 )     (3 )     (27 )     30       -       -       -       -  

Net purchase of treasury stock from stock awards for statutory tax withholdings

    -       -       -       (625 )     -       -       -       (625 )

Net treasury stock activity for deferred compensation trusts

    -       -       -       (172 )     -       -       -       (172 )

Purchase of treasury stock through publicly announced plans

    -       -       -       (4,524 )     -       -       -       (4,524 )

Common stock issued:

                                                               

Common stock issued through share-based awards and options exercises

    107,407       108       898       -       -       -       -       1,006  

Balance December 31, 2019

    24,650,051     $ 24,650     $ 378,606     $ (81,174 )   $ 2,187     $ 288,653     $ (695 )   $ 612,227  
9
 
   

For the Years Ended December 31, 2018, 2019, and 2020

 
   

Shares of
Common
Stock
Issued

   

Common
Stock

   

Paid-in
Capital

   

Treasury
Stock

   

Accumulated
Other
Comprehensive
(Loss) Income

   

Retained
Earnings

   

Noncontrolling
Interest

   

Total
Shareholders’
Equity

 

Net income attributable to Bryn Mawr Bank Corporation

    -       -       -       -       -       32,573       -       32,573  

Net loss attributable to noncontrolling interest

    -       -       -       -       -       -       (75 )     (75 )

Cumulative-effect adjustment due to the adoption of ASU No. 2016-13(2)

    -       -       -       -       -       (2,801 )     -       (2,801 )

Dividends paid or accrued, $1.06 per share

    -       -       -       -       -       (21,484 )     -       (21,484 )

Other comprehensive income, net of tax expense of $1,797

    -       -       -       -       6,761       -       -       6,761  

Stock based compensation

    -       -       3,044       -       -       -       -       3,044  

Retirement of treasury stock

    (3,816 )     (4 )     (41 )     45       -       -       -       -  

Net purchase of treasury stock from stock awards for statutory tax withholdings

    -       -       -       (633 )     -       -       -       (633 )

Net treasury stock activity for deferred compensation trusts

    -       -       -       (153 )     -       -       -       (153 )

Purchase of treasury stock through publicly announced plans

    -       -       -       (7,249 )     -       -       -       (7,249 )

Common stock issued:

                                                               

Common stock issued through share-based awards and options exercises

    67,733       68       44       -       -       -       -       112  

Balance December 31, 2020

    24,713,968     $ 24,714     $ 381,653     $ (89,164 )   $ 8,948     $ 296,941     $ (770 )   $ 622,322  

 

(1) Shares relating to the RBPI Merger (defined in Note 3, “Business Combinations,” below) recorded in April 2018. 

(2) The Corporation adopted ASU 2016-13 (Topic 326), Measurement of Credit Losses on Financial Instruments, on January 1, 2020. See Note 2, “Recent Accounting Pronouncements” in the accompanying Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

10
 

Notes to Consolidated Financial Statements

 

Note 1 - Summary of Significant Accounting Policies

 

A. Nature of Business

 

The Bryn Mawr Trust Company (the “Bank”) received its Pennsylvania banking charter in 1889 and is a member of the Federal Reserve System. In 1986, Bryn Mawr Bank Corporation (“BMBC”) was formed and on January 2, 1987, the Bank became a wholly-owned subsidiary of BMBC. The Bank and BMBC are headquartered in Bryn Mawr, Pennsylvania, located in the western suburbs of Philadelphia. BMBC and its direct and indirect subsidiaries (collectively, the “Corporation”) offer a full range of personal and business banking services, consumer and commercial loans, equipment leasing, mortgages, insurance and wealth management services, including investment management, trust and estate administration, retirement planning, custody services, and tax planning and preparation from 41 banking locations, seven wealth management offices and two insurance and risk management locations in the following counties: Montgomery, Chester, Delaware, Philadelphia, and Dauphin Counties in Pennsylvania; New Castle County in Delaware; and Mercer and Camden Counties in New Jersey. The common stock of BMBC trades on the NASDAQ Stock Market (“NASDAQ”) under the symbol BMTC.

 

The Bank’s subsidiary, BMT Insurance Advisors, Inc., completed the acquisition of Domenick, a full-service insurance agency established in 1993 and headquartered in Philadelphia, on May 1, 2018. The consideration paid was $1.5 million, of which $750 thousand was paid at closing, $225 thousand was paid during the third quarter of 2019, $175 thousand was paid during the second quarter of 2020 and one contingent cash payment, not to exceed $250 thousand, will be payable in 2021, subject to the attainment of certain targets during the year.

 

On December 15, 2017, the previously announced merger of Royal Bancshares of Pennsylvania, Inc. (“RBPI”) with and into BMBC (the “Effective Date”), and the merger of Royal Bank America with and into the Bank (collectively, the “RBPI Merger”), pursuant to the Agreement and Plan of Merger, by and between RBPI and BMBC, dated as of January 30, 2017 (the “Agreement”) was completed. Consideration paid totaled $138.7 million, comprised of 3,101,316 shares of BMBC’s common stock, the assumption of 140,224 warrants to purchase BMBC’s common stock valued at $1.9 million, $112 thousand for the cash-out of certain options and $7 thousand of cash in lieu of fractional shares. The RBPI Merger initially added $570.4 million of loans, $121.6 million of investments, $593.2 million of deposits, and twelve new branches. The acquisition of RBPI expands the Corporation further into Montgomery, Chester, Berks and Philadelphia Counties in Pennsylvania as well as Mercer and Camden Counties in New Jersey.

 

The Corporation operates in a highly competitive market area that includes local, national and regional banks as competitors along with savings banks, credit unions, insurance companies, trust companies, registered investment advisors and mutual fund families. The Corporation and its subsidiaries are regulated by many regulatory agencies including the Securities and Exchange Commission (“SEC”), Federal Deposit Insurance Corporation (“FDIC”), the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the Pennsylvania Department of Banking.

 

B. Basis of Presentation and Principles of Consolidation

 

The accounting policies of the Corporation conform to U.S. generally accepted accounting principles (“GAAP”).

 

The Consolidated Financial Statements include the accounts of BMBC and its consolidated subsidiaries. BMBC’s primary subsidiary is the Bank. The Corporation’s consolidated financial condition and results of operations consist almost entirely of the Bank’s financial condition and results of operations. In connection with the RBPI Merger, the Corporation acquired two Delaware trusts, Royal Bancshares Capital Trust I and Royal Bancshares Capital Trust II. These two entities are not consolidated per requirements under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation” (“ASC Topic 810”). All significant intercompany balances and transactions are eliminated in consolidation and certain reclassifications are made when necessary in order to conform the previous years’ consolidated financial statements to the current year’s presentation.

 

In preparing the Consolidated Financial Statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the balance sheets, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.

 

Although our current estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that in 2021 actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. The Corporation has identified certain areas that require estimates and assumptions, which include the allowance for credit losses (“ACL”) on loans and leases, the ACL on Off-Balance Sheet (“OBS”) Credit Exposures, the valuation of goodwill and intangible assets, the fair value of investment securities, the fair value of derivative financial instruments, and the valuation of mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation. In addition, certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances.

11
 

C. Cash and Cash Equivalents

 

Cash and cash equivalents include cash, interest-bearing and noninterest-bearing amounts due from banks, and federal funds sold. The Bank maintains cash reserve balances as required to meet regulatory reserve requirements of the Federal Reserve Board. The Bank had no cash reserve balances at December 31, 2020 as the Federal Reserve Board reduced the requirements to zero. Cash balances required to meet regulatory reserve requirements of the Federal Reserve Board amounted to $24.6 million at December 31, 2019.

 

D. Investment Securities

 

Investment securities which are held for indefinite periods of time, which the Corporation intends to use as part of its asset/liability strategy, or which may be sold in response to changes in credit quality of the issuer, interest rates, changes in prepayment risk, increases in capital requirements, or other similar factors, are classified as available for sale and are carried at fair value. Net unrealized gains and losses for such securities, net of tax, are required to be recognized as a separate component of shareholders’ equity and excluded from determination of net income. Gains or losses on disposition are based on the net proceeds and cost of the securities sold, adjusted for the amortization of premiums and accretion of discounts, using the specific identification method.

 

Investments for which management has the intent and ability to hold until maturity are classified as held to maturity and are carried at their amortized cost on the balance sheet. No adjustment for market value fluctuations are recorded related to the held to maturity portfolio.

 

Investment securities held in trading accounts consist of deferred compensation trust accounts, which are invested in listed mutual funds whose diversification is at the discretion of the deferred compensation plan participants. Investment securities held in trading accounts are reported at fair value, with adjustments in fair value reported through income.

 

E. ACL on Available for Sale Securities 

 

For available for sale debt securities in an unrealized loss position, management first assesses whether it intends to sell, or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available for sale debt securities that do not meet the aforementioned criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any explicit or implicit guarantees by the U.S. government, any changes to the rating of the security by the rating agency, and adverse conditions specifically related to the security, among other factors.

 

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

 

Changes in the ACL on available for sale debt securities are recorded as provision for (or release of) credit loss expense. Losses are charged against the ACL on available for sale debt securities when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

 

Accrued interest receivable on available for sale debt securities, which is reported in Accrued interest receivable on the Consolidated Balance Sheet, totaled $2.0 million at December 31, 2020 and is excluded from the estimate of credit losses.

12
 

F. ACL on Held to Maturity Securities

 

Management measures expected credit losses on held to maturity debt securities on a collective basis by major security type. The Corporation’s held to maturity debt securities consist of mortgage-backed securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. With respect to these securities, management considers the history of credit losses, current conditions and reasonable and supportable forecasts, which may indicate that the expectation that nonpayment of the amortized cost basis is or continues to be zero, even if the U.S. government were to default. Therefore, for those securities, the Corporation does not record expected credit losses. Accrued interest receivable on held to maturity debt securities, which is reported in Accrued interest receivable on the Consolidated Balance Sheet, totaled $37 thousand as of December 31, 2020 and is excluded from the estimate of credit losses.

 

G. Loans Held for Sale

 

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized temporary losses, if any, are recognized through a valuation allowance by charges to income.

 

H. Portfolio Loans and Leases

 

The Corporation originates construction, Commercial & Industrial, commercial mortgage, residential mortgage, home equity and consumer loans to customers primarily in southeastern Pennsylvania, as well as small-ticket equipment leases to customers nationwide. Although the Corporation has a diversified loan and lease portfolio, its debtors’ ability to honor their contracts is substantially dependent upon the real estate and general economic conditions of the region.

 

Loans and leases that management has the intention and ability to hold for the foreseeable future, or until maturity or pay-off, generally are reported at their outstanding principal balance adjusted for charge-offs, the allowance for credit losses on loans and leases and any deferred fees or costs on originated loans and leases. Interest income is accrued on the unpaid principal balance.

 

Loan and lease origination fees and loan and lease origination costs are deferred and recognized as an adjustment to the related yield using the interest method.

 

The accrual of interest on loans and leases is generally discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Loans and leases are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued, but not collected for loans that are placed on nonaccrual status or charged-off is charged against interest income. All interest accrued, but not collected, on leases that are placed on nonaccrual status is not charged against interest income until the lease becomes 120 days delinquent, at which point it is charged off. The interest received on these nonaccrual loans and leases is applied to reduce the carrying value of loans and leases. Loans and leases are returned to accrual status when all the principal and interest amounts contractually due are brought current and remain current for at least six months, and future payments are reasonably assured. Once a loan returns to accrual status, any interest payments collected during the nonaccrual period which had been applied to the principal balance are reversed and recognized as interest income over the remaining term of the loan.

 

Purchased loans and leases which have experienced more than insignificant credit deterioration since origination, purchased credit deteriorated (“PCD”) loans and leases, are recorded at the amount paid. An ACL is determined using the same methodology as other portfolio loans and leases. The initial ACL determined on a collective basis is allocated to individual loans. The loan’s purchase price is grossed-up by adding the allocated ACL to arrive at its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan or lease is a noncredit discount or premium, which is amortized into interest income over the life of the loan or lease. Subsequent changes to the ACL associated with PCD loans or leases are recorded through provision expense.

13
 

I. ACL on Loans and Leases

 

The ACL on loans and leases represents management’s estimate of all expected credit losses over the expected contractual life of our existing portfolio loans and leases. Determining the appropriateness of the ACL on loans and leases is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the ACL on loans and leases in those future periods.

 

The provision for credit losses recorded through earnings is the amount necessary to maintain the ACL on loans and leases at the amount of expected credit losses within the loans and leases portfolio. The amount of expense and the corresponding level of ACL on loans and leases are based on management’s evaluation of the collectability of the loan and lease portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors not captured in the historical loss experience. The ACL on loans and leases, as reported in our Consolidated Statements of Financial Condition, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of loan and lease amounts, net of recoveries. For further information on the ACL on loans and leases, see Note 5 - Loans and Leases in the accompanying Notes to Consolidated Financial Statements.

 

Management employs a disciplined process and methodology to establish the ACL on loans and leases that has two basic components: first, a collective (pooled) component for estimated expected credit losses for pools of loans and leases that share similar risk characteristics; and second, an asset-specific component involving individual loans and leases that do not share risk characteristics with other loans and leases and the measurement of expected credit losses for such individual loans.

 

Based upon this methodology, management establishes an asset-specific ACL on loans and leases that do not share risk characteristics with other loans and leases, which generally include nonaccrual loans and leases, TDRs, and PCD loans. The asset-specific ACL is based on the amount of expected credit losses calculated on those loans and leases and amounts determined to be uncollectible are charged off. Factors we consider in measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due.

 

When a loan or lease does not share risk characteristics with other loans or leases, they are individually evaluated for expected credit loss. For loans and leases that are not collateral-dependent, management measures expected credit loss as the difference between the amortized cost basis of the loan and the present value of expected future cash flows discounted at the loan’s effective interest rate. For collateral-dependent loans and leases, expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the underlying collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. If the calculated expected credit loss is determined to be permanent, fixed or nonrecoverable, the credit loss portion of the loan will be charged off against the ACL on loans and leases. Loans and leases designated as having significantly increased credit risk are generally placed on nonaccrual and remain in that status until all principal and interest payments are current and the prospects for future payments in accordance with the loan agreement are reasonably assured, at which point the loan is returned to accrual status.

 

In estimating the component of the ACL on loans and leases that share common risk characteristics, loans and leases are segregated into portfolio segments based on federal call report codes which classify loans and leases based on the primary collateral supporting the loan and lease. Methods utilized by management to estimate expected credit losses include 1) a discounted cash flow (“DCF”) methodology that discounts instrument-level contractual cash flows, adjusted for prepayments and curtailments, incorporating loss expectations, and 2) a weighted average remaining maturity (“WARM”) methodology which contemplates expected losses at a pool-level, utilizing historic loss information.

14
 

Under both methodologies, management estimates the ACL on loans and leases using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. After the end of the reasonable and supportable forecast period, the loss rates revert to the long-term mean loss rate, or in the case of an input-driven predictive method, the long-term mean of the input, using a reversion period where applicable. Historical credit loss experience, including examination of loss experience at representative peer institutions when the Corporation’s own loss history does not result in estimations that are meaningful to users of the Corporation’s Consolidated Financial Statements, provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are considered for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.

 

The DCF methodology uses inputs of current and forecasted macroeconomic indicators to predict future loss rates. The current macroeconomic indicator utilized by the bank is the Pennsylvania unemployment rate. In building the current expected credit loss (“CECL”) model utilized in the DCF methodology, a correlation between this indicator and historic loss levels was developed, enabling a prediction of future loss rates related to future Pennsylvania unemployment rates. The portfolio segments utilizing the DCF methodology as of December 31, 2020 included: CRE - owner-occupied and nonowner-occupied loans, home equity lines of credit, residential mortgages (first and junior liens), construction loans and consumer loans.

 

The WARM methodology uses combined historic loss rates for the Bank and peer institutions, if necessary, gathered from Call Report filings. The selected period for which historic loss rates are used is dependent on management’s evaluation of current conditions and expectations of future loss conditions. The portfolio segments utilizing the WARM methodology as of December 31, 2020 included Commercial & Industrial loans and leases.

 

For those loans and leases where the ACL is measured on a collective (pool) basis, management has identified the following portfolio segments based on federal call report codes which classify loans and leases based on the primary collateral supporting the loan or lease:

 

Commercial real estate (CRE) loans (owner-occupied and non-owner occupied): The Bank originates mortgage loans for multifamily properties (i.e. buildings which have five or more residential units) and other commercial real estate that is either owner-occupied or managed as an investment property (non-owner occupied) primarily within Pennsylvania, Delaware and Southern and Central New Jersey. Commercial real estate properties primarily include retail buildings/shopping centers, hotels, office/medical buildings and industrial/warehouse space. Multifamily loans are expected to be repaid from the cash flows of the underlying property so the collective amount of rents must be sufficient to cover all operating expenses, property management and maintenance, taxes and debt service. Increases in vacancy rates, interest rates or other changes in general economic conditions can have an impact on the borrower and its ability to repay the loan. Commercial real estate loans are generally considered to have a higher degree of credit risk than multifamily loans as they may be dependent on the ongoing success and operating viability of a fewer number of tenants who are occupying the property and who may have a greater degree of exposure to economic conditions.

 

Home equity lines of credit: The Bank originates the majority of its home equity lines of credit through its retail channel. The primary risk characteristics associated with home equity lines of credit typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as major medical expenses, catastrophic events, divorce and death. Home equity lines of credit are typically originated with variable or floating interest rates, which could expose the borrower to higher payments in a rising interest rate environment. Real estate values could decrease and cause the value of the underlying property to fall below the loan amount, creating additional potential loss exposure for the Bank.

 

Residential mortgages secured by first liens: The Bank originates one-to-four family residential mortgage loans primarily within Pennsylvania, Delaware and Southern and Central New Jersey. These loans are secured by first liens on a primary residence or investment property. The risks associated with residential mortgage loans typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as major medical expenses, catastrophic events, divorce or death. Residential mortgage loans that have adjustable rates could expose the borrower to higher payments in a rising interest rate environment. Real estate values could decrease and cause the value of the underlying property to fall below the loan amount, creating additional potential loss exposure for the Bank.

15
 

Residential mortgages secured by junior liens: The Bank originates loans secured by junior liens against one to four family properties primarily within Pennsylvania, Delaware and Southern and Central New Jersey. Loans secured by junior liens are primarily in the form of an amortizing home equity loan. These loans are subordinate to a first mortgage which may be from another lending institution. The risks associated with loans secured by junior liens typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income, unexpected significant expenses, such as for major medical expenses, catastrophic events, divorce or death. Real estate values could decrease and cause the value of the property to fall below the loan amount, creating additional potential loss exposure for the Bank.

 

Construction: The Bank originates construction loans to finance land development preparatory to erecting new structures or the on-site construction of industrial, commercial, or residential buildings. Construction loans include not only construction of new structures, but also additions or alterations to existing structures and the demolition of existing structures to make way for new structures. Construction loans are generally secured by real estate. The risks are typically specific to the uncertainty on whether the construction will be completed according to the specifications and schedules. Factors that may influence the completion of construction may be customer specific, such as the quality and depth of property management, or related to changes in general economic conditions.

 

Commercial & Industrial: The Bank originates lines of credit and term loans to operating companies for business purposes. The loans are generally secured by business assets such as accounts receivable, inventory, business vehicles and equipment as well as the stock of a company, if privately held. Commercial & Industrial loans are typically repaid first by the cash flows generated by the borrower’s business operations. The risks are typically specific to the underlying business and its ability to generate sustainable profitability and positive cash flow. Factors that may influence a borrower’s ability to repay their loan include demand for the business’ products or services, the quality and depth of management, the degree of competition, regulatory changes, and general economic conditions. The ability of the Bank to foreclose and realize sufficient value from business assets securing these loans is often uncertain. To mitigate the risk characteristics of Commercial & Industrial loans, commercial real estate may be included as a secondary source of collateral. The Bank will often require more frequent reporting requirements from the borrower in order to better monitor its business performance.

 

Consumer: The Bank originates or lines of credit to individuals for household, family, and other personal expenditures as well as overdrawn customer deposit balances which are reported as loans. This also represents all other loans that cannot be categorized in any of the previous mentioned loan segments. Consumer loans generally have higher interest rates and shorter terms than residential loans but tend to have higher credit risk due to the type of collateral securing the loan or in some cases the absence of collateral.

 

Leases: The Bank’s wholly-owned subsidiary Bryn Mawr Equipment Financing, Inc. specializes in equipment leases for small- and mid-sized businesses nationally and across a broad range of industries. The Bank’s credit risk generally results from the potential default of borrowers or lessees, which may be driven by customer specific or broader industry related conditions.

 

Accrued interest receivable on loans and leases, which is reported in Accrued interest receivable on the Consolidated Balance Sheet, totaled $12.1 million as of December 31, 2020 and is excluded from the estimate of credit losses due to our charge-off policy to reverse accrued interest in a timely manner on loans and leases that are 90-days past due and deemed nonperforming. However, the Corporation continued to accrue interest on loans and leases for which payment deferrals have been extended to borrowers affected by the COVID-19 pandemic. Deferrals under the Corporation’s modification program may be for durations which exceed the Corporation’s 90-day write-off policy for accrued interest. Therefore, these interest deferrals do not qualify for the Corporation’s election to not recognize a credit loss allowance for credit losses on accrued interest receivable. Accordingly, as of December 31, 2020, the Corporation has estimated credit losses for COVID-19 interest deferrals of $64 thousand, which is included as a reduction to Accrued interest receivable on the Consolidated Balance Sheet and Provision for credit losses on the Consolidated Income Statement.

16
 

Prior to January 1, 2020

 

As further described in Note 2, “Recent Accounting Pronouncements,” in the accompanying Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K on January 1, 2020, the Corporation adopted ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (or CECL) methodology.

 

Prior to the adoption of ASC 326 on January 1, 2020, the ACL on loans and leases was maintained at a level that the Corporation believed was sufficient to absorb estimated potential credit losses. Management’s determination of the adequacy of the ACL on loans and leases was based on guidance provided in ASC 450 - Contingencies and ASC 310 - Receivables, and involved the periodic evaluations of the loan and lease portfolio and other relevant factors. However, this evaluation was inherently subjective as it required significant estimates by management. Consideration was given to a variety of factors in establishing these estimates. Quantitative factors in the form of historical net charge-off rates by portfolio segment were considered. In connection with these quantitative factors, management established what it deems to be an adequate look-back period (“LBP”) for the charge-off history. As of December 31, 2019, management utilized a five-year LBP, which it believes adequately captures the trends in charge-offs. In addition, management developed an estimate of a loss emergence period (“LEP”) for each segment of the loan portfolio based on analyses of actual charge-offs tracked back in time to the triggering event for the eventual loss. The LEP estimates the time between the occurrence of a loss event for a borrower and an actual charge-off of a loan. In addition, various qualitative factors were considered, including the specific terms and conditions of loans, changes in underwriting standards, delinquency statistics, industry concentrations and overall exposure of a single customer. In addition, consideration was given to the adequacy of collateral, the dependence on collateral, and the results of internal loan reviews, including a borrower’s financial strengths, their expected cash flows, and their access to additional funds.

 

As part of the process of calculating the ACL on loans and leases for the different segments of the loan and lease portfolio, management considered certain credit quality indicators, including risk grades assigned to each loan and the performance/non-performance status of a loan.

 

Prior to January 1, 2020, a loan or lease was considered impaired when, based on current information, it was probable that management would be unable to collect the contractually scheduled payments of principal or interest. When assessing impairment, management considered various factors, which included payment status, realizable value of collateral and the probability of collecting scheduled principal and interest payments when due. Loans and leases that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

 

Management determined the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

For loans that indicated possible signs of impairment, which in most cases is based on the performance/non-performance status of the loan, an impairment analysis was conducted based on guidance provided by ASC 310-10. Impairment was measured by (i) the fair value of the collateral, if the loan was collateral-dependent, (ii) the present value of expected future cash flows discounted at the loan’s contractual effective interest rate, or (iii), less frequently, the loan’s obtainable market price.

 

In addition to originating loans, the Corporation occasionally acquired loans through mergers or loan purchase transactions. Some of these acquired loans exhibited deteriorated credit quality that has occurred since origination and, as such, management did not expect to collect all contractual payments. Prior to January 1, 2020, accounting for these purchased credit-impaired (“PCI”) loans was done in accordance with ASC 310-30. The loans were recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition on these loans was based on a reasonable expectation about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral-dependent, with the timing of the sale of loan collateral indeterminate, remained on nonaccrual status and had no accretable yield. On a regular basis, at least quarterly, PCI loans were assessed to determine if there had been any improvement or deterioration of the expected cash flows. If there had been improvement, an adjustment was made to increase the recognition of interest on the PCI loan, as the estimate of expected loss on the loan was reduced. Conversely, if there was deterioration in the expected cash flows of a PCI loan, a provision was recorded in connection with the loan.

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J. ACL on Off-Balance Sheet (OBS) Credit Exposures

 

Management estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. The ACL on OBS credit exposure, included within Other Liabilities on the Consolidated Balance Sheet, is adjusted as a provision for credit loss expense included within Provision for credit losses on the Consolidated Statement of Income. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Management estimates the amount of expected losses, for exposures that are not unconditionally cancellable by the bank, by first calculating a commitment usage factor over the contractual period. Management then applies the loss factors for the applicable portfolio segment as determined in the ACL on loans and leases methodology to the results of the usage calculation to estimate the liability for credit losses related to unfunded commitments. No credit loss estimate is reported for OBS credit exposures that are unconditionally cancellable by the Bank.

 

The ACL on OBS credit exposure as of December 31, 2020 was $2.9 million. For the year ended December 31, 2020 the Corporation recorded a provision for credit losses on OBS credit exposures of $1.7 million.

 

K. Troubled Debt Restructurings (TDRs”)

 

A TDR occurs when a creditor, for economic or legal reasons related to a borrower’s financial difficulties, modifies the original terms of a loan or lease, or grants a concession to the borrower that it would not otherwise have granted. A concession may include an extension of repayment terms, a reduction in the interest rate, or the forgiveness of principal and/or accrued interest. If the debtor is experiencing financial difficulty and the creditor has granted a concession, the Corporation will make the necessary disclosures related to the TDR. In certain cases, a modification or concession may be made in an effort to retain a customer who is not experiencing financial difficulty. This type of modification is not considered a TDR.

 

The Corporation has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of COVID-19. In accordance with the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), loans to borrowers experiencing financial difficulty related to the COVID-19 pandemic which were granted modifications after March 1, 2020 and which were not more than 30 days past due as of December 31, 2019 are exempt from TDR classification. In addition, for loans modified in response to the COVID-19 pandemic that do not meet the above delinquency criteria (e.g., not more than 30 days past due as of December 31, 2019), the Corporation applies the guidance included in an interagency statement issued by the bank regulatory agencies. This guidance states that loan modifications performed in light of the COVID-19 pandemic, including loan payment deferrals that are up to six months in duration, that were granted to borrowers who were less than 30 days past due as of the implementation date of a loan modification program or modifications granted under government mandated modification programs, are also exempt from TDR classification. For loan modifications that include a payment deferral and are not TDRs, the borrower’s past due and nonaccrual status will not be impacted during the deferral period. Interest income will continue to be recognized over the contractual life of the loan. As of December 31, 2020, 66 consumer loans and leases in the amount of $7.3 million and 37 commercial loans in the amount of $67.7 million are within a deferral period under the Bank’s COVID-19 modification programs, the total comprising 2.1% of the Bank’s portfolio loans and leases.

 

L. Other Real Estate Owned (OREO)

 

OREO consists of assets that the Corporation has acquired through foreclosure by either accepting a deed in lieu of foreclosure, or by taking possession of assets that were used as loan collateral. The Corporation reports OREO on the balance sheet as part of other assets, at the lower of cost or fair value less cost to sell, adjusted periodically based on current appraisals. Costs relating to the development or improvement of assets, as well as the costs required to obtain legal title to the property, are capitalized, while costs related to holding the property are charged to expense as incurred.

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M. Other Investments and Equity Stocks Without a Readily Determinable Fair Value

 

Other investments include Community Reinvestment Act (“CRA”) investments and equity stocks without a readily determinable fair value. The Corporation’s investments in equity stocks include those issued by the Federal Home Loan Bank of Pittsburgh (“FHLB”), the Federal Reserve Bank of Philadelphia (“FRB”) and Atlantic Central Bankers Bank. The Corporation is required to hold FHLB stock as a condition of its borrowing funds from the FHLB. As of December 31, 2020, the carrying value of the Corporation’s FHLB stock was $12.7 million. In addition, the Corporation is required to hold FRB stock based on the Corporation’s capital. As of December 31, 2020, the carrying value of the Corporation’s FRB stock was $12.5 million. Ownership of FHLB and FRB stock is restricted and there is no market for these securities. For further information on the FHLB stock, see Note 11, “Short-Term Borrowings and Long-Term FHLB Advances,” in the accompanying Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.

 

N. Premises and Equipment

 

Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method based on estimated useful lives of the assets. Depreciation of leasehold improvements is calculated using the straight-line method over the lives of the related leases or useful lives of the related assets, whichever is shorter. Whenever events or changes in circumstances dictate, the Corporation tests its long-lived assets for impairment by determining whether the sum of the estimated undiscounted future cash flows attributable to a long-lived asset or asset group is less than the carrying amount of the long-lived asset or asset group. In the event the carrying amount of the long-lived asset or asset group is not recoverable, an impairment loss is measured as the amount by which the carrying amount of the long-lived asset or asset group exceeds its fair value. Maintenance, repairs and minor improvements are charged to noninterest expense in the Consolidated Statements of Income as incurred.

 

For cloud computing arrangements in a service contract, the Corporation capitalizes costs for implementation activities in the application development stage depending on the nature of the costs. The costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. The costs capitalized are expensed over the term of the hosting arrangement, which is the fixed, noncancelable term of the arrangement, plus any reasonably certain renewal periods. The capitalized implementation costs and amortization expense related to these costs are included in Other assets and Other operating expenses in the Consolidated Balance Sheets and Consolidated Statements of Income, respectively. As of December 31, 2020 and 2019, the Corporation had $6.9 million and $2.9 million of capitalized software implementation costs for cloud computing arrangements in a service contract. Amortization expense related to these capitalized implementation costs for the years ended December 31, 2020 and 2019 amounted to $618 thousand and $280 thousand, respectively.

 

O. Operating Leases

 

The Corporation’s operating leases consist of various retail branch locations and corporate offices. Management determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets (“ROU assets”) and operating lease liabilities in our Consolidated Balance Sheets.

 

ROU assets and operating lease liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of unpaid lease payments, including extension options that the Corporation is reasonably certain will be exercised. As the majority of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate at the lease commencement date to determine the present value of unpaid lease payments. ROU assets represent our right to use underlying assets and are recorded as operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of ROU assets.

 

The Corporation’s leases include fixed rental payments, and certain of our leases also include variable rental payments where lease payments may increase at pre-determined dates based on the change in the consumer price index. The Corporation’s lease agreements include gross leases as well as leases in which we make separate payments to the lessor for items such as the property taxes assessed on the property or a portion of the common area maintenance associated with the property. We have elected the practical expedient not to separate lease and non-lease components for all of our building leases. The Corporation also elected to not recognize ROU assets and lease liabilities for short-term leases, which consist of certain leases of the Corporation’s limited-hour retirement community offices.

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P. Pension and Postretirement Benefit Plan

 

As of December 31, 2020, the Corporation had two non-qualified defined-benefit supplemental executive retirement plans and a postretirement benefit plan as discussed in Note 16, “Pension and Postretirement Benefit Plans,” in the accompanying Notes to the Consolidated Financial Statements in Annual Report on Form 10-K. Net pension expense related to the defined-benefit consists of service cost, interest cost, return on plan assets, amortization of prior service cost, amortization of transition obligations and amortization of net actuarial gains and losses. As it relates to the costs associated with the post-retirement benefit plan, the costs are recognized as they are incurred.

 

Q. Bank Owned Life Insurance (BOLI)

 

BOLI is recorded at its cash surrender value. Income from BOLI is tax-exempt and included as a component of noninterest income.

 

R. Derivative Financial Instruments

 

The Corporation recognizes all derivative financial instruments on its balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. The Corporation enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Corporation originates variable-rate loans with customers in addition to interest rate swap agreements, which serve to effectively swap the customers’ variable-rate loans into fixed-rate loans. The Corporation then enters into corresponding swap agreements with swap dealer counterparties to economically hedge its exposure on the variable and fixed components of the customer agreements. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC 815 and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820.

 

In addition to interest rate swaps with customers, the Corporation may also enter into a risk participation agreement with another institution as a means to assume a portion of the credit risk associated with a loan structure which includes a derivative instrument, in exchange for fee income commensurate with the risk assumed. This type of derivative is referred to as an “RPA sold.” In addition, in an effort to reduce the credit risk associated with an interest rate swap agreement with a borrower for whom the Corporation has provided a loan structured with a derivative, the Corporation may purchase a risk participation agreement from an institution participating in the facility in exchange for a fee commensurate with the risk shared. This type of derivative is referred to as an “RPA purchased.”

 

If a derivative has qualified as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is recognized in earnings immediately. To determine fair value, management uses valuations obtained from a third party which utilizes a pricing model that incorporates assumptions about market conditions and risks that are current as of the reporting date. Management reviews, annually, the inputs utilized by its independent third-party valuation organization.

 

The Corporation may use interest-rate swap agreements to modify the interest rate characteristics from variable to fixed, or fixed to variable, in order to reduce the impact of interest rate changes on future net interest income. If present, the Corporation accounts for its interest-rate swap contracts in cash flow hedging relationships by establishing and documenting the effectiveness of the instrument in offsetting the change in cash flows of assets or liabilities that are being hedged. To determine effectiveness, the management performs an analysis to identify if changes in fair value or cash flow of the derivative correlate to the equivalent changes in the forecasted interest receipts or payments related to a specified hedged item. Recorded amounts related to interest-rate swaps are included in other assets or liabilities. The change in fair value of the ineffective part of the instrument would need to be charged to the Statement of Income, potentially causing material fluctuations in reported earnings in the period of the change relative to comparable periods. In a fair value hedge, the fair value of the interest rate swap agreements and changes in the fair value of the hedged items are recorded in the Corporation’s consolidated balance sheets with the corresponding gain or loss being recognized in current earnings. The difference between changes in the fair values of interest rate swap agreements and the hedged items represents hedge ineffectiveness, and is recorded in net interest income in the statement of income. Management performs an assessment, both at the inception of the hedge and quarterly thereafter, to determine whether these derivatives are highly effective in offsetting changes in the value of the hedged items.

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S. Accounting for Stock-Based Compensation

 

Stock-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as an expense over the vesting period.

 

All share-based payments, including grants of stock options, restricted stock awards and performance-based stock awards, are recognized as compensation expense in the statement of income at their fair value. The fair value of stock option grants is determined using the Black-Scholes pricing model which considers the expected life of the options, the volatility of our stock price, risk-free interest rate and annual dividend yield. The fair value of the restricted stock awards and performance-based awards whose performance is measured based on an internally produced metric is based on their closing price on the grant date, while the fair value of the performance-based stock awards which use an external measure, such as total stockholder return, is based on their grant-date market value adjusted for the likelihood of attaining certain pre-determined performance goals and is calculated by utilizing a Monte Carlo Simulation model.

 

T. Earnings per Common Share

 

Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per common share takes into account the potential dilution that would occur if in-the-money stock options were exercised and converted into shares of common stock and restricted stock awards and performance-based stock awards were vested. Proceeds assumed to have been received on options exercises are assumed to be used to purchase shares of BMBC’s common stock at the average market price during the period, as required by the treasury stock method of accounting. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive.

 

U. Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net deferred tax assets are included within the other assets line item on the Consolidated Balance Sheets.

 

The Corporation recognizes the benefit of a tax position only after determining that the Corporation would more-likely-than-not sustain the position following an examination. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the Consolidated Financial Statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement with the relevant tax authority. Management applies these criteria to tax positions for which the statute of limitations remains open.

 

V. Revenue Recognition

 

With the exception of nonaccrual loans and leases, the Corporation recognizes all sources of income on the accrual method.

 

Additional information relating to wealth management fee revenue recognition follows:

The Corporation earns wealth management fee revenue from a variety of sources including fees from trust administration and other related fiduciary services, custody, investment management and advisory services, employee benefit account and IRA administration, estate settlement, tax service fees, shareholder service fees and brokerage. These fees are generally based on asset values and fluctuate with the market. Some revenue is not directly tied to asset value but is based on a flat fee for services provided. For many of our revenue sources, amounts are not received in the same accounting period in which they are earned. However, each source of wealth management fees is recorded on the accrual method of accounting.

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The most significant portion of the Corporation’s wealth management fees is derived from trust administration and other related services, custody, investment management and advisory services, and employee benefit account and IRA administration. These fees are generally billed monthly, in arrears, based on the market value of assets at the end of the previous billing period. A smaller number of customers are billed in a similar manner, but on a quarterly or annual basis, and some revenues are not based on market values.

 

The balance of the Corporation’s wealth management fees includes estate settlement fees and tax service fees, which are recorded when the related service is performed, and asset management and brokerage fees on non-depository investment products, which are received one month in arrears, based on settled transactions, but are accrued in the month the settlement occurs.

 

Included in other assets on the balance sheet is a receivable for wealth management fees that have been earned but not yet collected.

 

Insurance revenue is primarily related to commissions earned on insurance policies and is recognized over the related policy coverage period.

 

W. Mortgage Servicing

 

A portion of the residential mortgage loans originated by the Corporation is sold to third parties; however, the Corporation may retain the servicing rights related to these loans. A fee, usually based on a percentage of the outstanding principal balance of the loan, is received in return for these services. Gains on the sale of these loans are based on the specific identification method.

 

An intangible asset, referred to as mortgage servicing rights (“MSRs”) is recognized when a loan’s servicing rights are retained upon sale of a loan. MSRs are initially recorded at fair value based on a third-party valuation model which calculates the present value of estimated future servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates. Mortgage loan prepayment speed is the annual rate at which borrowers are forecasted to repay their mortgage loan principal and is based on historical experience. The discount rate is used to determine the present value of future net servicing income. Another key assumption in the model is the required rate of return the market would expect for an asset with similar risk. These assumptions can, and generally will, change quarterly valuations as market conditions and interest rates change. Subsequent to the initial valuation, MSRs amortize to noninterest expense in proportion to, and over the period of, the estimated future net servicing life of the underlying loans.

 

MSRs are evaluated quarterly for impairment based upon the fair value of the rights as compared to their carrying amount. Impairment is determined by stratifying the MSRs by predominant characteristics, such as interest rate and terms. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If management later determines that all of a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported within Other operating expenses on the Consolidated Statement of Income. The fair value of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

 

X. Goodwill and Intangible Assets

 

The Corporation accounts for goodwill and intangible assets in accordance with ASC 350, “Intangibles - Goodwill and Other.” The amount of goodwill initially recorded is based on the fair value of the acquired entity at the time of acquisition. Management performs goodwill and intangible assets impairment testing annually, as of October 31, or when events occur or circumstances change that would more likely than not reduce the fair value of the acquisition or investment. Goodwill impairment is tested on a reporting unit level. The Corporation currently has three reporting units: Banking, Wealth Management and Insurance. As of December 31, 2020, the Insurance reporting unit did not meet the quantitative thresholds for separate disclosure as an operating segment, and is therefore reported as a component of the Wealth Management segment, based on its internal reporting structure. While the Insurance reporting unit did not meet the threshold for reporting as a separate operating segment for goodwill testing, the Insurance segment was tested for impairment. An operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

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Management’s impairment testing methodology is consistent with the methodology prescribed in ASC 350. Management completes a goodwill impairment analysis at least on an annual basis, or more often if events and circumstances indicate that there may be impairment. Management also reviews other intangible assets with finite lives for impairment if events and circumstances indicate that the carrying value may not be recoverable.

 

Note 2 - Recent Accounting Pronouncements

 

The following FASB Accounting Standards Updates (“ASUs”) are divided into pronouncements which have been adopted by the Corporation during the year ended December 31, 2020, and those which are not yet effective as of December 31, 2020 and have been evaluated or are currently being evaluated by management.

 

Adopted Pronouncements in 2020:

 

FASB ASU 2016-13 (Topic 326), Measurement of Credit Losses on Financial Instruments

 

On January 1, 2020, the Corporation adopted ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (or CECL) methodology. This standard eliminates the Provision for Loan and Lease Losses and Allowance for Loan and Lease Losses line items and establishes the Provision for Credit Losses (“PCL”) and ACL line items.

 

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to OBS credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

 

The Corporation adopted ASC 326 using the modified retrospective approach method for all financial assets measured at amortized cost and OBS credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. In conjunction with the adoption of CECL, the Corporation has revised its segmentation to align with the methodology applied in determining the ACL for loans and leases under CECL, which is based on federal call report codes which classify loans based on the primary collateral supporting the loan. Segmentation prior to the adoption of CECL was based on product type or purpose. As such, certain reclassifications were made to conform prior-period amounts to current period presentation.

 

Upon adoption, the Corporation’s total ACL increased by $4.0 million, or 17.5%, which included an increase in ACL on loans and leases of $3.2 million and an increase in the reserve for OBS exposures, which is included within Other Liabilities on the Consolidated Balance Sheet, of $821 thousand. The increase in the total ACL resulted in a $2.8 million decrease to retained earnings, net of deferred taxes. The overall change in total ACL upon adoption was primarily due to the move to a life of loan reserve estimate as well as methodology changes required under CECL.

 

The Corporation adopted CECL using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $481 thousand of the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2020.

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The following table illustrates the adoption of CECL on January 1, 2020:

 

   

January 1, 2020

 
   

Pre-CECL
Adoption

   

Reclassification

to CECL
Portfolio

Segmentation

   

Pre-CECL
Adoption
Portfolio

Segmentation

   

Post-CECL
Adoption
Portfolio

Segmentation

   

Impact of
CECL
Adoption

 

Assets:

                                       

Loans and leases:

                                       

Commercial mortgage

  $ 1,913,430     $ (1,913,430 )   $ -     $ -     $ -  

CRE - nonowner-occupied

    -       1,337,167       1,337,167       1,337,464       297  

CRE - owner-occupied

    -       527,607       527,607       527,607       -  

Home equity lines of credit

    194,639       29,623       224,262       224,262       -  

Residential mortgage

    489,903       (489,903 )     -       -       -  

Residential mortgage - first liens

    -       706,690       706,690       706,843       153  

Residential mortgage - junior liens

    -       36,843       36,843       36,843       -  

Construction

    159,867       42,331       202,198       202,198       -  

Commercial & Industrial

    709,257       (277,030 )     432,227       432,248       21  

Consumer

    57,139       102       57,241       57,241       -  

Leases

    165,078       -       165,078       165,088       10  

Total loans and leases

  $ 3,689,313     $ -     $ 3,689,313     $ 3,689,794     $ 481  
                                         

ACL on loans and leases

                                       

Commercial mortgage

  $ 10,434     $ (10,434 )   $ -     $ -     $ -  

CRE - nonowner-occupied

    -       7,960       7,960       7,493       (467 )

CRE - owner-occupied

    -       2,825       2,825       2,841       16  

Home equity lines of credit

    890       224       1,114       1,068       (46 )

Residential mortgage

    1,538       (1,538 )     -       -       -  

Residential mortgage - first liens

    -       2,501       2,501       4,909       2,408  

Residential mortgage - junior liens

    -       338       338       417       79  

Construction

    997       233       1,230       871       (359 )

Commercial & Industrial

    6,029       (2,194 )     3,835       3,676       (159 )

Consumer

    353       85       438       578       140  

Leases

    2,361       -       2,361       3,955       1,594  

Total ACL on loans and leases

  $ 22,602     $ -     $ 22,602     $ 25,808     $ 3,206  
                                         

Liabilities:

                                       

ACL on OBS credit exposures

  $ 360     $ -     $ 360     $ 1,181     $ 821  
                                         

Total ACL

  $ 22,962     $ -     $ 22,962     $ 26,989     $ 4,027  
                                         

Retained earnings:

                                       

Total increase in ACL

                                  $ 4,027  

Balance sheet reclassification

                                    (481 )

Total pre-tax impact

                                    3,546  

Tax effect

                                    (745 )

Decrease to retained earnings

                                  $ 2,801  
24
 

FASB ASU 2017-04 (Topic 350), Intangibles - Goodwill and Others

 

Issued in January 2017, ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 became effective for the Corporation on January 1, 2020, and will follow such guidance in connection with our next annual impairment testing, or prior to that if any such change constitutes a triggering event outside of the quarter from when the annual goodwill impairment test is performed. Management does not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements and related disclosures.

 

FASB ASU 2018-13, Fair Value Measurement Disclosure Framework

 

Issued in August 2018, ASU 2018-13 modifies, adds and removes certain disclosures aimed to improve the overall usefulness of the disclosure requirements for fair value measurements. The guidance became effective for the Corporation on January 1, 2020 and the adoption of this ASU did not have a material impact on our Consolidated Financial Statements and related disclosures.

 

Pronouncements Not Effective as of December 31, 2020:

 

FASB ASU 2018-14 (Topic 715), “Compensation-Retirement Benefits - Defined Benefit Plans-General”

 

Issued in August 2018, the ASU 2018-14, modifies, adds and removes certain disclosures aimed to improve the overall usefulness of the disclosure requirements to financial statement users. The guidance is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. Use of the retrospective method is required. Management does not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements and related disclosures.

 

FASB ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes

 

Issued in December 2019, ASU 2019-12 adds new guidance to simplify accounting for income taxes, changes the accounting for certain income tax transactions and makes minor improvements to the codification. The guidance is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. Management does not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements and related disclosures.

 

FASB ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

 

Issued in March 2020, ASU No. 2020-04 provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Specifically, the guidance permits an entity, when certain criteria are met, to consider amendments to contracts made to comply with reference rate reform to meet the definition of a modification under GAAP. It further allows hedge accounting to be maintained and a one-time transfer or sale of qualifying held-to-maturity securities. The expedients and exceptions provided by the amendments are permitted to be adopted any time through December 31, 2022 and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for certain optional expedients elected for certain hedging relationships existing as of December 31, 2022. The Corporation will apply the guidance to any contracts modifications made due to reference rate reform.

25
 

Note 3 - Business Combinations

 

Domenick & Associates (Domenick)

 

The Bank’s subsidiary, BMT Insurance Advisors, Inc., completed the acquisition of Domenick, a full-service insurance agency established in 1993 and headquartered in the Old City section of Philadelphia, on May 1, 2018. The consideration paid was $1.5 million, of which $750 thousand was paid at closing, $225 thousand was paid during the third quarter of 2019, $175 thousand was paid during the second quarter of 2020 and one contingent cash payment, not to exceed $250 thousand, will be payable in 2021, subject to the attainment of certain targets during the year.

 

The following table details the consideration paid, the initial estimated fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition and the resulting goodwill recorded:

 

(dollars in thousands)

       

Consideration paid:

       

Cash paid at closing

  $ 750  

Contingent payment liability (present value)

    706  

Value of consideration

  $ 1,456  
         

Assets acquired:

       

Cash and due from banks

    370  

Intangible assets - customer relationships

    779  

Premises and equipment

    1  

Other assets

    316  

Total assets

    1,466  
         

Liabilities assumed:

       

Accounts payable

    657  

Other liabilities

    30  

Total liabilities

  $ 687  
         

Net assets acquired

  $ 779  
         

Goodwill resulting from acquisition of Domenick

  $ 677  

 

As of June 30, 2018, the estimates of the fair value of identifiable assets acquired and liabilities assumed in the Domenick acquisition were final.

 

Royal Bancshares of Pennsylvania, Inc.

 

On December 15, 2017, the previously announced merger of Royal Bancshares of Pennsylvania, Inc. (“RBPI”) with and into BMBC (the “Effective Date”), and the merger of Royal Bank America with and into the Bank (collectively, the “RBPI Merger”), pursuant to the Agreement and Plan of Merger, by and between RBPI and BMBC, dated as of January 30, 2017 (the “Agreement”) was completed. In accordance with the Agreement, the aggregate share consideration paid to RBPI shareholders consisted of 3,101,316 shares of BMBC’s common stock. Shareholders of RBPI received 0.1025 shares of BMBC’s common stock for each share of RBPI Class A common stock and 0.1179 shares of BMBC’s common stock for each share of RBPI Class B common stock owned as of the Effective Date of the RBPI Merger, with cash-in-lieu of fractional shares totaling $7 thousand. Holders of in-the-money options to purchase RBPI Class A common stock received cash totaling $112 thousand. In addition, 1,368,040 warrants to purchase Class A common stock of RBPI, valued at $1.9 million were converted to 140,224 warrants to purchase BMBC’s common stock. In accordance with the acquisition method of accounting, assets acquired and liabilities assumed were preliminarily adjusted to their fair values as of the Effective Date. The excess of consideration paid above the fair value of net assets acquired was recorded as goodwill. This goodwill is not amortizable nor is it deductible for income tax purposes.

26
 

In connection with the RBPI Merger, the consideration paid and the estimated fair value of identifiable assets acquired and liabilities assumed as of the Effective Date, which include the effects of any measurement period adjustments in accordance with ASC 805-10, are summarized in the following table:

 

(dollars in thousands)

       

Consideration paid:

       

Common shares issued (3,101,316)

  $ 136,768  

Cash in lieu of fractional shares

    7  

Cash-out of certain options

    112  

Fair value of warrants assumed

    1,853  

Value of consideration

  $ 138,740  
         

Assets acquired:

       

Cash and due from banks

    17,092  

Investment securities available for sale

    121,587  

Loans

    566,228  

Premises and equipment

    8,264  

Deferred income taxes

    34,823  

Bank-owned life insurance

    16,550  

Core deposit intangible

    4,670  

Favorable lease asset

    566  

Other assets

    13,611  

Total assets

  $ 783,391  
         

Liabilities assumed:

       

Deposits

    593,172  

FHLB and other long-term borrowings

    59,568  

Short-term borrowings

    15,000  

Junior subordinated debentures

    21,416  

Unfavorable lease liability

    322  

Other liabilities

    31,381  

Total liabilities

  $ 720,859  
         

Net assets acquired

  $ 62,532  
         

Goodwill resulting from acquisition of RBPI

  $ 76,208  

 

As of December 31, 2018, the estimates of the fair value of identifiable assets acquired and liabilities assumed in the RBPI Merger were final.

27
 

Due Diligence, Merger-Related and Merger Integration Expenses

 

Due diligence, merger-related and merger integration expenses include consultant costs, investment banker fees, contract breakage fees, retention bonuses for severed employees, salary and wages for redundant staffing involved in the integration of the institutions and bonus accruals for members of the merger integration team. The following table details the costs identified and classified as due diligence, merger-related and merger integration costs for the periods indicated:

 

   

Year Ended December 31,

 

(dollars in thousands)

 

2020

   

2019

   

2018

 

Advertising

  $ -     $ -     $ 61  

Employee Benefits

    -       -       271  

Occupancy and bank premises

    -       -       2,145  

Furniture, fixtures, and equipment

    -       -       365  

Data processing

    -       -       421  

Professional fees

    -       -       1,450  

Salaries and wages

    -       -       852  

Other

    -       -       2,196  

Total due diligence, merger-related and merger integration expenses

  $ -     $ -     $ 7,761  

 

Note 4 - Investment Securities

 

The amortized cost and fair value of investments, which were classified as available for sale, are as follows:

 

As of December 31, 2020

 

(dollars in thousands)

 

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair Value

 

U.S. Treasury securities

  $ 500,095     $ 5     $ -     $ 500,100  

Obligations of the U.S. government and agencies

    92,449       868       (219 )     93,098  

Obligations of state and political subdivisions

    2,149       22       -       2,171  

Mortgage-backed securities

    441,575       12,739       (457 )     453,857  

Collateralized mortgage obligations

    18,680       583       -       19,263  

Collateralized loan obligations

    94,500       1       (97 )     94,404  

Corporate bonds

    11,000       421       -       11,421  

Other investment securities

    650       -       -       650  

Total

  $ 1,161,098     $ 14,639     $ (773 )   $ 1,174,964  

 

As of December 31, 2019

 

(dollars in thousands)

 

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair Value

 

U.S. Treasury securities

  $ 500,066     $ 35     $ -     $ 500,101  

Obligations of the U.S. government and agencies

    102,179       193       (352 )     102,020  

Obligations of state and political subdivisions

    5,366       13       -       5,379  

Mortgage-backed securities

    360,977       5,182       (157 )     366,002  

Collateralized mortgage obligations

    31,796       195       (159 )     31,832  

Collateralized loan obligations

    -       -       -       -  

Corporate bonds

    -       -       -       -  

Other investment securities

    650       -       -       650  

Total

  $ 1,001,034     $ 5,618     $ (668 )   $ 1,005,984  
28
 

The following tables present the aggregate amount of gross unrealized losses as of December 31, 2020 and December 31, 2019 on available for sale investment securities classified according to the amount of time those securities have been in a continuous unrealized loss position:

 

As of December 31, 2020

 

   

Less than 12
Months

   

12 Months
or Longer

   

Total

 

(dollars in thousands)

 

Fair
Value

   

Unrealized

Losses

   

Fair
Value

   

Unrealized

Losses

   

Fair
Value

   

Unrealized

Losses

 

Obligations of the U.S. government and agencies

  $ 19,777     $ (219 )   $ -     $ -     $ 19,777     $ (219 )

Mortgage-backed securities

    79,990       (457 )     -       -       79,990       (457 )

Collateralized loan obligations

    31,903       (97 )     -       -       31,903       (97 )

Total

  $ 131,670     $ (773 )   $ -     $ -     $ 131,670     $ (773 )

 

As of December 31, 2019

 

   

Less than 12
Months

   

12 Months
or Longer

   

Total

 

(dollars in thousands)

 

Fair
Value

   

Unrealized

Losses

   

Fair
Value

   

Unrealized

Losses

   

Fair
Value

   

Unrealized

Losses

 

Obligations of the U.S. government and agencies

  $ 48,497     $ (315 )   $ 7,966     $ (37 )   $ 56,463     $ (352 )

Mortgage-backed securities

    33,783       (119 )     5,977       (38 )     39,760       (157 )

Collateralized mortgage obligations

    6,978       (67 )     10,861       (92 )     17,839       (159 )

Total

  $ 89,258     $ (501 )   $ 24,804     $ (167 )   $ 114,062     $ (668 )

 

As of December 31, 2020, the Corporation’s available for sale investment securities consisted of 431 securities, 37 of which were in an unrealized loss position.

 

As of December 31, 2020, management had not made a decision to sell any of the Corporation’s available for sale investment securities in an unrealized loss position, nor did management consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis. Management has evaluated available for sale debt securities that are in an unrealized loss position and has determined that the decline in value is unrelated to credit loss and is related to the change in market interest rates since purchase. Factors considered in this evaluation included the extent to which fair value is less than amortized cost, any explicit or implicit guarantees by the U.S. government, any changes to the rating of the security by the rating agency, and adverse conditions specifically related to the security, among other factors. As of December 31, 2020, approximately 90.8% of the Corporation’s available for sale investment securities were U.S. Treasuries or mortgage-backed securities or collateral mortgage obligations which were issued or guaranteed by U.S. government-sponsored entities and agencies. In addition, none of the available for sale debt securities held by the Corporation are past due as of December 31, 2020.

 

As of December 31, 2020 and December 31, 2019, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

 

As of December 31, 2020 and December 31, 2019, securities having a fair value of $282.3 million and $156.4 million, respectively, were specifically pledged as collateral for public funds, trust deposits, the FRB discount window program, FHLB borrowings, collateral requirements in derivative contracts, and other purposes. Advances by the FHLB are collateralized by a blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation’s borrowing agreement with the FHLB as well as certain securities individually pledged by the Corporation.

29
 

The amortized cost and fair value of available for sale investment and mortgage-related securities available for sale as of December 31, 2020 and December 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   

December 31, 2020

   

December 31, 2019

 

(dollars in thousands)

 

Amortized
Cost

   

Fair
Value

   

Amortized
Cost

   

Fair
Value

 

Investment securities:

                               

Due in one year or less

  $ 502,465     $ 502,489     $ 504,851     $ 504,890  

Due after one year through five years

    18,679       19,167       38,710       38,623  

Due after five years through ten years

    77,433       77,681       53,598       53,457  

Due after ten years

    102,266       102,507       11,102       11,180  

Subtotal

    700,843       701,844       608,261       608,150  

Mortgage-related securities(1)

    460,255       473,120       392,773       397,834  

Total

  $ 1,161,098     $ 1,174,964     $ 1,001,034     $ 1,005,984  

 

(1) Expected maturities of mortgage-related securities may differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment penalties.

 

The Corporation did not have any sales of available for sale investment securities for the years ended December 31, 2020 or 2019. Proceeds from the sale of available for sale investment securities totaled and $7 thousand for the year ended December 31, 2018. Net gain on sale of available for sale investment securities totaled $7 thousand for the year ended December 31, 2018.

 

The amortized cost and fair value of investment securities held to maturity as of December 31, 2020 and December 31, 2019 are as follows:

 

As of December 31, 2020

 

(dollars in thousands)

 

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair

Value

 

Mortgage-backed securities

  $ 14,759     $ 451     $ (24 )   $ 15,186  

 

As of December 31, 2019

 

(dollars in thousands)

 

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair

Value

 

Mortgage-backed securities

  $ 12,577     $ 104     $ (20 )   $ 12,661  

 

The following tables present the aggregate amount of gross unrealized losses as of December 31, 2020 and December 31, 2019 on held to maturity securities classified according to the amount of time those securities have been in a continuous unrealized loss position:

 

As of December 31, 2020

 

   

Less than 12
Months

   

12 Months
or Longer

   

Total

 

(dollars in thousands)

 

Fair
Value

   

Unrealized
Losses

   

Fair
Value

   

Unrealized
Losses

   

Fair
Value

   

Unrealized
Losses

 

Mortgage-backed securities

  $ 4,224     $ (24 )   $ -     $ -     $ 4,224     $ (24 )
30
 

As of December 31, 2019

 

   

Less than 12
Months

   

12 Months
or Longer

   

Total

 

(dollars in thousands)

 

Fair
Value

   

Unrealized
Losses

   

Fair
Value

   

Unrealized
Losses

   

Fair
Value

   

Unrealized
Losses

 

Mortgage-backed securities

  $ 3,159     $ (20 )   $ -     $ -     $ 3,159     $ (20 )

 

The amortized cost and fair value of held to maturity investment securities as of December 31, 2020 and December 31, 2019, by contractual maturity, are shown below:

 

   

December 31, 2020

   

December 31, 2019

 

(dollars in thousands)

 

Amortized
Cost

   

Fair Value

   

Amortized
Cost

   

Fair

Value

 

Mortgage-backed securities(1)

  $ 14,759     $ 15,186     $ 12,577     $ 12,661  

 

(1) Expected maturities of mortgage-related securities may differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment penalties.

 

As of December 31, 2020 and December 31, 2019, the Corporation’s investment securities held in trading accounts totaled $8.6 million and $8.6 million, respectively, and primarily consist of deferred compensation trust accounts which are invested in listed mutual funds whose diversification is at the discretion of the deferred compensation plan participants and rabbi trust accounts established to fund certain unqualified pension obligations. Investment securities held in trading accounts are reported at fair value, with adjustments in fair value reported through income. Changes in the fair value of investments held in the deferred compensation trust accounts create corresponding changes in the liability to the deferred compensation plan participants.

 

Note 5 - Loans and Leases

 

The loan and lease portfolio consists of loans and leases originated by the Corporation, as well as loans acquired in prior acquisitions. Certain tables in this footnote are presented with a breakdown between originated and acquired loans and leases.

 

As further described in Note 2, “Recent Accounting Pronouncements,” in the accompanying Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K, the Corporation adopted ASC 326 using the modified retrospective approach method for all financial assets measured at amortized cost and OBS credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

 

In conjunction with the adoption of CECL, the Corporation has revised its segmentation to align with the methodology applied in determining the ACL for loans and leases under CECL, which is based on federal call report codes which classify loans based on the primary collateral supporting the loan. Segmentation prior to the adoption of CECL was based on product type or purpose. As such, certain reclassifications were made to conform prior-period amounts to current period presentation.

31
 

A. The following table details the amortized cost of loans and leases as of the dates indicated:

 

   

December 31, 2020

   

December 31, 2019

 

(dollars in thousands)

 

Originated

   

Acquired

   

Total

Loans and

Leases

   

Originated

   

Acquired

   

Total

Loans and

Leases

 

Loans held for sale

  $ 6,000     $ -     $ 6,000     $ 4,249     $ -     $ 4,249  

Real estate loans:

                                               

Commercial real estate (CRE) - nonowner-occupied

    1,330,947       104,628       1,435,575       1,161,815       175,352       1,337,167  

Commercial real estate (CRE) - owner-occupied

    544,782       33,727       578,509       479,466       48,141       527,607  

Home equity lines of credit

    157,385       11,952       169,337       209,239       15,023       224,262  

Residential mortgage - 1st liens

    540,307       81,062       621,369       604,884       101,806       706,690  

Residential mortgage - junior liens

    22,375       1,420       23,795       34,903       1,940       36,843  

Construction

    153,131       8,177       161,308       193,307       8,891       202,198  

Total real estate loans

    2,748,927       240,966       2,989,893       2,683,614       351,153       3,034,767  

Commercial & Industrial

    442,283       4,155       446,438       425,322       6,905       432,227  

Consumer

    39,603       80       39,683       54,913       2,328       57,241  

Leases

    149,914       2,483       152,397       156,967       8,111       165,078  

Total portfolio loans and leases

    3,380,727       247,684       3,628,411       3,320,816       368,497       3,689,313  

Total loans and leases

  $ 3,386,727     $ 247,684     $ 3,634,411     $ 3,325,065     $ 368,497     $ 3,693,562  

Loans with fixed rates

  $ 1,198,908     $ 134,084     $ 1,332,992     $ 1,251,762     $ 216,269     $ 1,468,031  

Loans with adjustable or floating rates

    2,187,819       113,600       2,301,419       2,073,303       152,228       2,225,531  

Total loans and leases

  $ 3,386,727     $ 247,684     $ 3,634,411     $ 3,325,065     $ 368,497     $ 3,693,562  

Net deferred loan origination fees (costs) included in the above loan table

  $ 673     $ -     $ 673     $ (193 )   $ -     $ (193 )

  

B. The following table details the components of net investment in leases:

 

   

December 31, 2020

   

December 31, 2019

 

(dollars in thousands)

 

Originated

   

Acquired

   

Total

Leases

   

Originated

   

Acquired

   

Total

Leases

 

Minimum lease payments receivable

  $ 164,556     $ 2,583     $ 167,139     $ 174,385     $ 8,753     $ 183,138  

Unearned lease income

    (20,746 )     (138 )     (20,884 )     (23,641 )     (813 )     (24,454 )

Initial direct costs and deferred fees

    6,104       38       6,142       6,223       171       6,394  

Total Leases

  $ 149,914     $ 2,483     $ 152,397     $ 156,967     $ 8,111     $ 165,078  

 

C. The following table details the amortized cost of nonperforming loans and leases as of the dates indicated:

 

   

December 31, 2020

   

December 31, 2019

 

(dollars in thousands)

 

Originated

   

Acquired

   

Total

Loans

and

Leases

   

Originated

   

Acquired

   

Total

Loans

and

Leases

 

CRE - nonowner-occupied

  $ 57     $ -     $ 57     $ 199     $ -     $ 199  

CRE - owner-occupied

    823       836       1,659       1,523       2,636       4,159  

Home equity lines of credit

    515       214       729       636       -       636  

Residential mortgage - 1st liens

    26       73       99       630       1,817       2,447  

Residential mortgage - junior liens

    50       35       85       83       -       83  

Construction

    -       -       -       -       -       -  

Commercial & Industrial

    1,657       118       1,775       1,799       381       2,180  

Consumer

    30       -       30       19       42       61  

Leases

    791       81       872       747       136       883  

Total non-performing loans and leases

  $ 3,949     $ 1,357     $ 5,306     $ 5,636     $ 5,012     $ 10,648  
32
 

D. Age Analysis of Past Due Loans and Leases

 

The following tables present an aging of all portfolio loans and leases as of the dates indicated:

 

   

Accruing Loans and Leases

                 
As of December 31, 2020   30 - 59     60 - 89    

Over

89

                Total              

(dollars in thousands)

 

Days
Past

Due

   

Days
Past

Due

   

Days
Past

Due

   

Total

Past
Due

   

Current

   

Accruing
Loans and

Leases

   

Nonaccrual
Loans and

Leases

   

Total
Loans and

Leases

 

 

                                                               

CRE - nonowner-occupied

  $ -     $ -     $ -     $ -     $ 1,435,518     $ 1,435,518     $ 57     $ 1,435,575  

CRE - owner-occupied

    1,907       416       -       2,323       574,527       576,850       1,659       578,509  

Home equity lines of credit

    87       -       -       87       168,521       168,608       729       169,337  

Residential mortgage - 1st liens

    6,020       217       -       6,237       615,033       621,270       99       621,369  

Residential mortgage - junior liens

    88       58       -       146       23,564       23,710       85       23,795  

Construction

    -       -       -       -       161,308       161,308       -       161,308  

Commercial & Industrial

    -       -       -       -       444,663       444,663       1,775       446,438  

Consumer

    32       16       -       48       39,605       39,653       30       39,683  

Leases

    1,196       810       -       2,006       149,519       151,525       872       152,397  

Total portfolio loans and leases

  $ 9,330     $ 1,517     $ -     $ 10,847     $ 3,612,258     $ 3,623,105     $ 5,306     $ 3,628,411  

 

   

Accruing Loans and Leases

                 
As of December 31, 2019   30 - 59     60 - 89    

Over

89

                Total              

(dollars in thousands)

 

Days
Past

Due

   

Days
Past

Due

   

Days
Past

Due

   

Total

Past
Due

   

Current

   

Accruing
Loans and

Leases

   

Nonaccrual
Loans and

Leases

   

Total
Loans and

Leases

 

CRE - nonowner-occupied

  $ 184     $ -     $ -     $ 184     $ 1,336,784     $ 1,336,968     $ 199     $ 1,337,167  

CRE - owner-occupied

    2,462       -       -       2,462       520,986       523,448       4,159       527,607  

Home equity lines of credit

    354       365       -       719       222,907       223,626       636       224,262  

Residential mortgage - 1st liens

    1,639       388       -       2,027       702,216       704,243       2,447       706,690  

Residential mortgage - junior liens

    116       -       -       116       36,644       36,760       83       36,843  

Construction

    -       -       -       -       202,198       202,198       -       202,198  

Commercial & Industrial

    -       -       -       -       430,047       430,047       2,180       432,227  

Consumer

    98       140       -       238       56,942       57,180       61       57,241  

Leases

    857       594       -       1,451       162,744       164,195       883       165,078  

Total portfolio loans and leases

  $ 5,710     $ 1,487     $ -     $ 7,197     $ 3,671,468     $ 3,678,665     $ 10,648     $ 3,689,313  
33
 

The following tables present an aging of originated portfolio loans and leases as of the dates indicated:

 

   

Accruing Loans and Leases

                 
As of December 31, 2020   30 - 59     60 - 89